Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill
Tuesday 8th June 2021
(3 years, 6 months ago)
Commons ChamberRead Full debate Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021 Read Hansard Text Watch Debate Read Debate Ministerial Extracts
Madam Deputy Speaker (Dame Rosie Winterton)
Before I ask the Minister to move Second Reading, I will introduce a three-minute time limit on Back-Bench speeches. As colleagues will know, this is a very short debate, but I will try to get in as many Members as I can.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
I beg to move, That the Bill be read a Second time.
In the United Kingdom there are a wide range of opportunities for people to invest. The Government’s role is to try to ensure that the system of regulation and financial investment is suitably robust, so that individuals are treated fairly and have confidence in the financial system in which they invest. Unfortunately, no system of regulation can completely eradicate the risk that firms fail, or that there are bad actors intent on committing fraud. This short Bill is aimed at two areas where it is necessary for the Government to step in.
Clause 1 relates to a new Government scheme to compensate London Capital & Finance bond holders who lost money after the firm entered administration in 2019. Clause 2 will arrange a loan to the board of the pension protection fund to pay compensation to occupational pension scheme members who have been victims of pension fraud, following the recent High Court judgment in the case of PPF v. Dalriada. I will now expand briefly on those measures in detail.
Gareth Thomas (Harrow West) (Lab/Co-op)
The Minister will understand that part of the reason why we are here today is because of Dame Elizabeth Gloster’s excoriating report into the capacity of the Financial Conduct Authority. Is he certain that the FCA now has the powers and, crucially, the capacity it needs to ensure that consumers of financial services businesses are properly protected?
Guy Opperman
Yes, I believe that is the case. The Treasury and the FCA are working together. The FCA is under new management, as the hon. Gentleman will be aware, and there is an acceptance by the FCA of all the findings in Dame Elizabeth Gloster’s report. More particularly there is fresh thinking, one hopes, that will be applied going forward.
Kevin Hollinrake (Thirsk and Malton) (Con)
Will the Minister give way on that point?
Kevin Hollinrake
Powers are one thing, willingness is another. The FCA has shown a remarkable reluctance to hold people to account for incompetence or bad actors, as the Minister said. Will not those failings simply continue unless the FCA starts identifying individuals, within its own ranks or within the banks, for those failings, and holds them to account?
Guy Opperman
Clearly, it is not possible to comment on specific future events, but Ministers are liable for the actions of civil servants, through vicarious liability, and we would expect regulators to take a similar approach and, putting it simply, to own the problems they are trying to solve. If that is a lesson learned from this sorry saga, in my humble opinion that would be a good thing. Clearly, it is for the FCA to take a good long, hard, look at itself, and other regulatory bodies, and decide how it will run itself going forward, with suitable input from Government.
Neale Hanvey (Kirkcaldy and Cowdenbeath) (Alba)
Will the Minister give way?
Guy Opperman
I will not give way any more. I apologise, but we are trying to do this whole debate in 58 minutes. Please bear with me.
As the House will be aware, on 19 April the Economic Secretary to the Treasury provided a written ministerial statement on the Government’s approach to setting up a compensation scheme for London Capital & Finance bond holders who lost money following the firm’s collapse in 2019. LCF was an FCA authorised firm, which sold unregulated non-transferrable debt securities, commonly known as mini-bonds, to investors. Sadly, 11,600 bond holders lost around £237 million when LCF went into administration. For some investors that will have formed part of an investment portfolio, but for others it will have represented a significant proportion of their savings.
Following LCF’s collapse, the Economic Secretary to the Treasury directed the FCA to launch an independent investigation into its regulation and supervision of LCF. As we have discussed, Dame Elizabeth Gloster led the investigation and concluded that the FCA did not effectively supervise and regulate LCF. The LCF business model was, it is accepted, highly unusual in both its scale and structure. In particular, the firm was authorised by the FCA, despite generating no income from regulated activities. That allowed LCF’s unregulated activity of selling non-transferrable debt securities, known as mini-bonds, to benefit from the impact of being issued by an authorised firm. While other mini-bond firms have failed, LCF is the only mini-bond firm that was authorised by the FCA and sold bonds in order to on-lend to other companies.
In response to the regulatory failings detailed in Dame Elizabeth’s report and the range of interconnected factors that led to losses for bondholders, the Government announced two things: first, they would establish a compensation scheme, and secondly, they would accept all of Dame Elizabeth’s report, as did the FCA. It is, however, important to emphasise that the circumstances surrounding LCF are unique and exceptional, and the Government cannot and should not be expected to stand behind every failed investment firm. That would, with respect, create the wrong incentives for individuals and an unacceptable burden on the taxpayer.
Clause 1 of the Bill, which is the LCF measure, covers two key elements. First, it provides parliamentary authority for the Treasury to incur expenditure in relation to the scheme. Secondly, it makes a minor technical change that disapplies the FCA’s rule-making processes for the purpose of the LCF compensation scheme. The Treasury intends to use part 15A of the Financial Services and Markets Act 2000 to require the Financial Services Compensation Scheme to administer the scheme at speed on the Treasury’s behalf. The scheme will be available to all LCF bondholders who have not already received compensation from the FSCS and represents 80% of the compensation that they would have received had they been eligible for FSCS protection.
Around 97% of LCF bondholders invested less than £85,000 and will not reach the compensation cap under either the Government’s scheme or the FSCS. The Government expect to pay out around £120 million in compensation to around 8,800 bondholders in total and are committed to ensuring that the scheme has made all payments within six months of this Bill securing Royal Assent.
As colleagues will be aware, this is a two-measure Bill, the second clause of which concerns the Department for Work and Pensions and involves loans to the board of the Pension Protection Fund. Clause 2 amends the Pensions Act 2004 by inserting a new section that will give the Secretary of State a power to lend money to the board of the Pension Protection Fund.
The Pension Protection Fund manages the Fraud Compensation Fund, which pays compensation to occupational pension schemes that have lost out financially due to dishonesty. When set up in 2004 by the Blair Government, the PPF and the FCF did not envisage that pension liberation schemes were in scope for FCF payments. This clause will allow compensation to an estimated 8,806 individuals who have been defrauded following the pronouncement of the recent Court judgment in the Dalriada case.
Pension liberation fraud involves members being persuaded to transfer their pension savings from legitimate schemes to fraudulent schemes, with promises of high investment returns or access to a loan from their pension scheme before the age of 55 without incurring a tax charge. The Pensions Regulator has now placed professional pensions trustees in charge of the affected schemes. Those trustees are seeking compensation on behalf of scheme members through the Fraud Compensation Fund.
Following receipt of a significant number of applications, the Pension Protection Fund sought guidance from the High Court in a test case on which schemes should be eligible for the Fraud Compensation Fund. The Court judgment in the case of the Pension Protection Fund vs. Dalriada was pronounced on 6 November 2020, and the High Court concluded that such pension liberation schemes would be eligible, subject to meeting eligibility criteria. The Government have decided to fully accept the Court’s judgment on this and are committed to ensuring that all those who have been victims of pension liberation schemes are able to claim through the Fraud Compensation Fund. However, it is estimated that claims will exceed £350 million, which is far greater than the £26.2 million of assets currently held in the Fraud Compensation Fund, hence the requirement for clause 2 of the Bill and the action that the DWP and the Government are taking.
This is a necessary, urgent and important Bill which will ensure financial protection and fair outcomes for those falling victim in these particular circumstances. My hope and expectation is that the Bill will receive widespread support, and I commend its contents to the House.
Mr Pat McFadden (Wolverhampton South East) (Lab)
I am grateful to the Minister. As he said, the Bill does two things: it enables a Government compensation scheme for the victims of the collapse of London Capital and Finance, and it authorises a Government loan to the Fraud Compensation Fund—part of the Pension Protection Fund—to be paid for through a levy on the pensions industry. Let me take each of those of turn.
I will start with clause 1 on the LCF compensation scheme. The Minister set out the background and I do not need to repeat it in this short debate, but it involves 11,500 investors losing a total of about £237 million. Some £56 million has been paid out by the Financial Services Compensation Scheme to just under 3,000 of those investors, covering those parts of LCF activity that came under the remit of the Financial Conduct Authority’s regulated activities. The Bill aims to compensate the rest up to 80% of the £85,000 FSCS limit, meaning pay-outs of up to £68,000 for those eligible. This is expected to cost the taxpayer about £120 million.
Lloyd Russell-Moyle (Brighton, Kemptown) (Lab/Co-op)
Talking about the cost to the taxpayer, I wonder if my right hon. Friend continues to be shocked by the fact that a Member of this House, the hon. Member for Plymouth, Moor View (Johnny Mercer), received over £85,000 from subsidiaries that were mis-selling, like a company in my constituency that defrauded my constituents. That money has never been paid back, but that Member received money from the taxpayer, and actually we should be looking at ourselves—
Mr McFadden
I am grateful to my hon. Friend, and I do think it ill behoves any Member, given the scale of the losses and given the necessity of the Government to bring in this Bill to compensate people for their losses, to profit from this either directly or indirectly. I think that should be clear to all of us.
The Government are legislating on this because of the litany of regulatory failures set out in the report on this issue carried out by Dame Elizabeth Gloster. These failures included failures to respond to repeated warnings from investors and potential investors, LCF repeatedly running promotions implying its products were regulated by the FCA, and failures of communication between different parts of the FCA, all in the end leading to this collapse and financial loss. Had the FCA acted earlier, far fewer people would have invested through this firm, losses would have been lower and the taxpayer would not be faced with the £120 million we are talking about today.
Neale Hanvey
I would like to ask the right hon. Gentleman’s view about a couple in my Kirkcaldy and Cowdenbeath constituency who invested £10,000 each—or £20,000 in total—and did so because the FCA backed the scheme. They feel that the real responsibility lies with FCA and the derogation of its responsibility in ignoring warning signs, while many responsible lenders such as them have lost money they can ill afford to lose. Does he not find it, as I do, a bit rich for the Minister now to say that the Government cannot back every scheme when actually the regulator was at fault in encouraging other people, as he has just said, to invest in that scheme?
Mr McFadden
Many investors did invest because they thought that these mini-bonds were authorised by the FCA, and they were not. A big part of the problem here is having a regulated firm marketing unregulated products. If I am right, the hon. Member’s constituents may be eligible for the compensation authorised by the Bill.
Dame Elizabeth’s report makes it clear how badly the investors were let down by the regulator, and both the Government and the FCA have said that they accept the findings. I have a number of questions that I want to put to the Minister for his wind-up at the end of the debate. First, why is the level of compensation he has chosen 80% of the FSCS level? On what basis was that decision made? Secondly, how will this work practically? I understand that the Government want to avoid the involvement of claims management companies, and that is something I think we would all endorse. How will the Government do that and avoid repeated rounds of claims?
The Bill also gives rise to some important broader questions about policy. The failings identified were serious and substantial, and have to be addressed. The first of those broader questions is: when should compensation paid for by the taxpayer be paid and when not? The Minister quite rightly said that the taxpayer cannot stand behind every investment policy. It would be unfair on taxpayers to expect them to do so, and it would produce perverse incentives. After all, we all know that the value of investments can go down as well as up.
In the case of LCF, it was bonds that were being sold, and the advertising implied a guaranteed pay-out when such pay-outs could not, in practice, be guaranteed. Regulation is not aimed at enabling people to make reasonably informed choices and to understand the risks they are taking. Having made the decision to offer taxpayer-funded compensation in this case, when does the Minister believe it justifiable that the taxpayer should be asked to do that, and when does he not? What was the discussion in the Treasury about how to ring-fence this failure and this company from broader claims for financial compensation? There are calls for compensation quite regularly when investment failures happen. How confident is the Minister that the Treasury will not be subject to legal action from victims of other investment failings?
How confident is the Minister that the FCA can actually make the changes necessary to avoid a repeat of the findings set out in Dame Elizabeth’s report? Callers were phoning the FCA for three years before the company’s collapse. Appendix 6 of Dame Elizabeth’s report states that the FCA received 611 queries from consumers regarding LCF. That is not a random phone call at five o’clock on a Friday that can be missed; it is a pattern of people trying repeatedly to raise red flags and getting nowhere
Individual A said on 15 July 2016:
“This company is doing exactly what the pyramid scams are doing. What they’re doing is they’re paying the money out, the interest out from money which people are paying on the bond… In other words, it’s just a pyramid scam… they’re saying they’ve got charges on their property, security on them, assets on their property, of course they don’t have any assets. It’s all horrendous really, the whole thing”.
There was call after call like that, and they were not acted on. They were not passed up the line, partly because the mini bonds were not regulated. In fact, one caller was told by the FCA call handler that it was not a scam.
There was also the letter from individual financial adviser Neil Liversidge in 2015, three full years before the collapse of the company. He warned that LCF had one customer who was worth—bear with me on the language, Madam Deputy Speaker; I am quoting—
“the square root of bugger all”
and he tried to raise warnings about the practices and health of the company. It appears that that letter was lost.
One of the more damning findings in Dame Elizabeth’s report is that, even if the letter had not been lost,
“It is unlikely that it would have resulted in any, or any substantive, action or re-action by the FCA.”
So little faith did she have in the processes that she appears to have argued that it did not matter that that warning letter had been lost because it would not have been acted on. Imagine if the FCA had acted, in 2015 or 2016, when those reports were received, rather than only at the end of 2018. Another question for the Minister is this: what will the FCA do to improve its handling of reports like this?
Then, there is the so-called halo effect of regulated companies selling unregulated products. Being regulated by the FCA featured heavily in LCF promotions. The financial promotions team at the FCA did warn LCF to dial back on the advertising, but the pattern went on and on, and no one drew the conclusion that this was not just an advertising problem, but a problem with the content of what it was actually selling. Dame Elizabeth states in her report:
“A substantial proportion of the Bondholders said that they would not have invested in LCF had it not been for the fact that it was regulated by the FCA.”
How will the FCA avoid the difference between unregulated activity and regulated companies from being exploited in the future?
The Gloster report was also the subject of a well-publicised disagreement between Andrew Bailey, the Governor of the Bank of England, and Dame Elizabeth, about the nature of responsibility and accountability. Where do the Government stand on this issue? It was all played out before the Treasury Committee in several hearings. Is it the Treasury’s view that senior officials in leading regulatory bodies are responsible for the failing that happen on their watch, or should responsibility apply only to the organisation collectively?
Does the Minister agree with the statement in the report that
“It is difficult to see why an individuals’ willingness to take on challenging tasks in public bodies should absolve them from accountability”?
Or does the Treasury accept the statement from the Parliamentary Commission on Banking Standards quoted in the report that
“A buck that does not stop with an individual...stops nowhere”?
These broader questions matter, because with ever more complex financial markets, the regulators have to be equipped to do the job—equipped through their leadership and their systems, but also through the resources at their disposal. Part of the backdrop to this is the FCA taking on responsibility for tens of thousands more firms after it took on the responsibilities of the Office of Fair Trading back in 2014. Is the Minister confident that it has the resources after the LCF collapse?
Let me turn to clause 2 and the fraud compensation fund. The Bill authorises a loan to be made as a consequence of greater than expected claims on that fund arising from the Dalriada case. It is estimated that the judgment in that case could result in claims of over £300 million. The loan will be funded by a levy on the pensions industry, to be paid back over the next 10 to 15 years. That comes on top of the levy to pay for the Financial Services Compensation Scheme rising sharply since the introduction of the Government’s pension freedom legislation in 2015. Back then, the levy was £300 million; this year, it will be over £1 billion pounds. That is a 48% increase on the previous year and more than triple the level of five years ago. Why does the Minister think the FSCS levy has had to increase so much since the pension freedoms legislation was introduced in 2015? Now we have a new fraud levy to boot.
Surely the right way to tackle this issue is to ask why more and more pensioners are being exposed to fraud and scams in the first place. Why does the Minister think that is happening? Why are more pensioners losing their money? When the previous Chancellor introduced the pension freedoms changes, he said that
“there will be free impartial guidance available to all.”
Six years on, the take-up of that advice is just 3%. Even when the Department for Work and Pensions made a targeted push to increase it, it only got up to 11%, so the vast majority of people using these freedoms are not using that service. Of the small number who take up the option, 72% say they do something different from their first inclination after receiving advice, so it is clear that such advice can help people to make a better decision, yet take-up is nowhere near the promise made at the time.
The promise of pension freedoms being matched with good, trustworthy financial advice has not been kept, and these levies, which will have to be paid by the pension schemes that have been nowhere near fraud and are trying to offer a good service to their members, are being put in place at least in part as a result of the Government’s own pension reforms, which have left more pensioners exposed to fraud and scams. That conclusion was endorsed by the Work and Pensions Committee in its recent report.
What unites both these clauses is people being subject to fraud, often through online advertising. There is a clear need for greater action on this. People are being bombarded on a daily basis with adverts for investments, some of which are scams and attempts at fraud. Financial innovation can be a great thing, but consumers need help in navigating this world, and they are currently being failed by a regulatory system that is lagging behind what is actually happening in the financial markets. There is an online harms Bill coming that, as things stand, does not include plans to crack down on financial crime. I urge the Government to think again on that. To proceed with that Bill without tackling online financial harm would be an enormous lost opportunity to protect consumers against this type of crime.
The answer is not just compensation when people lose money; it is to protect people against financial scams happening before they lose their money, to crack down on the fraudsters while they are peddling their scams and to stop these adverts reaching people in the first place. Not all thieves wear masks. It is possible to rob people of their money through misleading websites and illusory promises of financial gain. It is critical that the laws that we pass in this place keep pace with the innovations in fraud and financial crime that are taking place. For that to happen, it will take a lot more than the two clauses on compensation in this Bill.
Madam Deputy Speaker (Dame Rosie Winterton)
We now go to the Chair of the Treasury Committee, who has four minutes.
Mel Stride (Central Devon) (Con) [V]
This is a very important Bill. It seeks to compensate for some significant wrongs. As part of our ongoing inquiry into London Capital & Finance and the FCA’s response to it, the Treasury Committee has heard many harrowing stories of those who, in many cases, lost life-changing amounts of money as a consequence of what happened.
The Treasury Committee has been involved in the LCF situation for some time. My predecessor, Baroness Morgan, initiated the inquiry by Dame Elizabeth Gloster through approaches by the Committee to the Treasury and the FCA. I take this opportunity to offer my thanks, on behalf of the Committee and of the LCF bond holders, for the very thorough report that she and her team produced, for the witness session she attended as part of our inquiry and for the courtesy and information that she provided to me outside that witness session by way of correspondence and discussions over the telephone.
Dame Elizabeth Gloster carried out some excellent work. As a consequence of her report, the level of the failings on the part of the FCA is very clear. Indeed, the answers to the key questions put by the Government to Dame Elizabeth as part of the directions for her inquiry were clear: the permissions granted to LCF were not appropriate to the business it carried on; the FCA did not adequately supervise LCF’s compliance with the FCA rules and policies; and the FCA’s handling of information from third parties regarding LCF was wholly deficient. The FCA had appropriate rules to regulate the communication of financial promotions by LCF. However, the FCA did not have in place appropriate policies. Numerous red flags were examined by the Committee, but they had been missed over a long period.
There were wider failings within the regulatory system, and we have heard some of those from the shadow Minister, the right hon. Member for Wolverhampton South East (Mr McFadden). The FCA’s approach to the perimeter was limited. It did not take a holistic view of the perimeter and therefore there was inadequate supervision of unregulated activities. The halo effect, which the shadow Minister also raised, was without doubt a wider systemic problem within the FCA.
Our inquiry is ongoing. We have taken evidence from Dame Elizabeth, from senior personnel at the FCA, including Andrew Bailey, who was the chief executive officer of the FCA during the appropriate period, and my hon. Friend the Economic Secretary to the Treasury. We will have much to say in our report, which will be published no later than the end of this month.
Looking ahead, the speakers so far have rightly asked how we make sure that this does not happen again. That lies within the transformation programme that the FCA is now undertaking. The Committee will be showing a close and careful interest in the progress of that transformation programme.
By way of intervention, I note the observation of my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) about the importance of those responsible for shortcomings being held accountable. We will no doubt have something to say about that in the report.
The whole issue of compensation leads on to the issue of the general view that there should be personal responsibility for investments, as well as Government backing, and we will need to look at that. I am terribly short of time, so I will leave it there. I welcome the Bill.
Madam Deputy Speaker (Dame Rosie Winterton)
We now go to the SNP spokesperson, Peter Grant, who I am sure will be acutely aware of the very limited amount of time that we have left for the debate.
Peter Grant (Glenrothes) (SNP) [V]
I am pleased to be able to speak in this short debate and to confirm that the SNP will not oppose Second Reading, but I am angry and frustrated that the debate needs to take place at all. Most parts of the legislation are only necessary because of a catalogue of failures of Government, of legislation and of regulators.
I will speak first about the second of the two parts, on the Pension Protection Fund. One of the first times I spoke in Parliament, just a few days after my maiden speech, I expressed concerns about pension liberation scams. I asked the then Secretary of State what steps the Government were taking to protect people from them, to make sure changing the rules would not just make open season for the scammers. We now know that the answer to that question is that the Government were doing nothing, or if they were doing anything, they did not do nearly enough. Some £350 million has been stolen from people’s pensions using these scams. Those pensioners should be compensated from the Pension Protection Fund, and I would support a provision in clause 2 to allow that to happen.
Clause 1 sets up the promised compensation scheme for victims of the London Capital & Finance scandal. About 11,000 people were affected, of whom 2,000 got some compensation and 9,000 got nothing. I do not think any of the 11,000 understand why some qualified for compensation and some did not. It is very welcome that the Bill will provide some redress for the 9,000 or so bondholders who would have otherwise got nothing. It is welcome, but it is not enough.
The House of Commons Library has described the Government’s decision to set up the compensation scheme as “a somewhat exceptional response.” The response is exceptional, but the scandal to which it responds is anything but. It is the latest, and sadly almost certainly not the last, in a roll of shame that includes Equitable Life, Premier FX, Connaught, Henley pensions, Blackmore Bond and many others. The victims of some of these schemes get compensation, but tens of thousands get nothing.
Blackmore Bond, for example, went into administration in May 2020 and its bondholders are unlikely to see any of the £46 million investment that the company’s directors had promised them was safe and guaranteed. One of my constituents lost his £40,000 life savings to Blackmore Bond. I have to disagree with the Minister’s claim that LCF was unique or even distinctive in any material way from Blackmore Bond and various other mini-bond failures. LCF hid behind its own FCA registration knowing that it had nothing to do with the products it was selling. Blackmore Bond hid behind the FCA registration of other companies that acted as its representatives. The intention in all cases was clear: to mislead investors as to the degree of protection that the Financial Conduct Authority would give them, when in most cases the companies knew that the FCA would give no protection whatever.
Like LCF, Blackmore Bond could have been stopped much sooner if the Financial Conduct Authority had acted on the warnings it was receiving as long ago as early 2017. One came from an eyewitness who offered to let the FCA into his office to watch and listen at first hand to the “unlawful” telephone sales practices that the company’s representatives, Amyma Ltd, were using—his words, not mine. It took two and a half years for the FCA to remove Amyma’s right to act as authorised representatives. Several months later, again as part of its response to the collapse of LCF, the FCA banned the sale of mini-bonds to small retail investors. Some £26 million of the total investor losses in Blackmore Bond were from bonds sold after March 2017—after the Financial Conduct Authority had enough information to take decisive action, but before it had taken the action that was needed.
I want to see legislation, or possibly even an amendment to this Bill, that makes schemes similar to the LCF compensation scheme available to victims of other pension and investment scams without them having to wait for a public inquiry and a new Act of Parliament for every single one. I want to see the Government getting serious about dealing with the shysters and charlatans who too often seem to walk away unscathed from these scandals, or more likely get driven away in their chauffeur-driven luxury cars, leaving their victims in many cases almost destitute. I want to see a regulatory regime that works, not just to compensate the victims at public expense, but to stop the crooks and chancers from being able to con people out of their money in the first place.
The fact that the Minister admitted in his opening speech that paying compensation to all victims of pension or investment scams would place an unacceptable burden on the public finances is one of the biggest admissions of regulatory failure by any Government Minister that I can ever remember. While we welcome the steps taken in the Bill, the message very clearly from the Scottish National party, as it was from the Labour Front-Bench spokesman a few minutes ago, is that this is not even enough to be the start of the action needed to make people’s pensions and investments safe from the crooks.
James Grundy (Leigh) (Con)
I thank the Minister and the Economic Secretary to the Treasury for bringing this Bill to the House. I welcome this Second Reading debate and am pleased that the Government are making tangible progress. I also thank Dame Gloster for her report and welcome the fact that the Government have accepted its nine recommendations. My contribution will be brief and I hope that, given the time constraints, Members will forgive me for not taking interventions.
Will my hon. Friend the Economic Secretary clarify whether bondholders will be required to surrender all their bonds to qualify for the Government’s scheme? If that is the case, some of my constituents who invested considerable sums in the scheme will be forced to surrender all their bonds, regardless of the amount invested, to receive the maximum £68,000 of compensation offered by the Government, as opposed to their being able to surrender a portion of their bonds to gain access to the Government’s compensation scheme while still potentially being able to receive further dividend payments direct from the administrators, thereby ensuring that their loss is reduced. My constituents need clarity and it would be most welcome if the Department would consider that. I recently wrote to my hon. Friend about this matter and very much look forward to hearing his response.
John McDonnell (Hayes and Harlington) (Lab) [V]
The Bill will bring relief to thousands of investors who were let down not just by a failed company but by a failed system. That is why we need a Bill that will address the failures of regulation, governance and auditing, but this Bill does none of that. The Government are yet again bailing out victims of an under-regulated finance system that is regularly ripping off smaller investors. I have to say that Government Ministers are guilty of gross negligence for standing by while this happens time and again.
LCF was offering customers mini-bonds. The FCA said:
“There is no legal definition of a ‘mini-bond’”,
but it did nothing to stop the mis-selling. The FCA saw no issue with LCF’s operations, yet in March 2019 HMRC found that products advertised as ISAs by LCF did not meet the rules. In addition, the FCA was advising that investments would be protected by the financial services compensation scheme; the High Court judged that they were not. The FCA was asleep at the wheel.
The then chief executive of the FCA, who is now the Governor of the Bank of England, sat on his haunches and did nothing. Some 18 months ago, I called on the previous Chancellor, the right hon. Member for Bromsgrove (Sajid Javid), to delay Mr Bailey’s appointment as Governor, given the concerns.
I am pleased that the Dame Elizabeth Gloster’s report actually identifies some of the problems. She described the FCA’s supervision of LCF as “wholly deficient” and said that there were “significant gaps and weaknesses” in the FCA’s practices. She said that staff were
“not…trained sufficiently to analyse a firm’s financial information to detect indicators of fraud or other serious irregularity.”
LCF’s founder was Simon Hume-Kendall, a former chairman of the Tunbridge Wells Conservatives and a party donor. It has been reported that the investors’ cash in LCF has been used to buy horses, a helicopter and lifetime memberships to private Mayfair clubs. Perhaps the Minister could update us on the ongoing inquiries into the activities of this gentleman and LCF.
As has been said, this is not a one-off. There are so many other examples, including Blackmore, Basset & Gold and Chilango. Perhaps the Minister can tell us when further Bills will be introduced to compensate the investors in those schemes who lost so much money. I welcome the Bill—of course I do—but it is now time for the Government to bring forward serious legislation to stop crimes like this happening in the first place and to protect our constituents from these spivs.
Sammy Wilson (East Antrim) (DUP) [V]
I welcome the Bill. Those of my constituents who have been affected by the collapse of LCF will welcome the fact that, as a result of the excellent report by Dame Elizabeth, which really lifted the lid on how the Financial Conduct Authority failed in its obligations, the Government have been forced into the position we are in today with this Bill. I welcome that.
As other speakers have said, this is not the first time that the Financial Conduct Authority has failed in its regulatory duty and failed people who are innocents in all of this. Firms assure them that they are regulated and that protection is available, but the savings they invest are then snatched from them. Let us look at the failure of the FCA in this particular case. It failed to meet its statutory obligations. It failed to take any action even when it was found that a regulated firm was engaging solely in unregulated lending. Surely that must have raised concerns that the firm was using its regulated status to engage in activities that were unregulated. Its staff were clearly not trained in taking complaints and passing them on. Indeed, as Dame Elizabeth pointed out, they were actually assuring the public that the claims being made by LCF were correct and that their savings were safe. Even when fraud was passed on up the line to supervisors, again it was ignored. All these regulatory failures require the Government to ensure that there is compensation for individuals.
I agree with the Minister that we cannot cover every spiv and every chancer who tries to take money from people. If we are going to avoid that, we must have proper regulations. If the Financial Conduct Authority has proven that it is not up to the job, new regulators have to be put in place. Those who take on the responsibilities of the Financial Conduct Authority have to be held responsible as well. We cannot simply say that it is about the institution or the people who are in charge; we have to avoid this happening again so that people in my constituency who have suffered do not continue to suffer from these kinds of actions.
Rebecca Long Bailey (Salford and Eccles) (Lab) [V]
My constituents were not professional financial investors; most were senior citizens relying on the investment for their pension. They worked hard in their younger years to save a little bit here, a little bit there, to ensure that in their twilight years they would have enough to live on—but this security was savagely snatched away from them. They were duped by grossly misleading and deceitful marketing and let down by negligent regulators and ineffective auditors.
Although I am broadly supportive of the Bill, there are two very urgent issues that the Government must address. First, the compensation is capped at 80% of what victims would have been entitled to had they been eligible for the financial services compensation scheme. They were denied that protection simply because mini-bonds were not regulated. The Gloster report states:
“The FCA had identified the risks to consumers posed by mini-bonds from as early as 2013 and the additional risks relating to the use of mini-bonds as a quasi-investment vehicle by at least 2017.”
Yet the FCA and the Government failed to regulate. The Government must therefore recognise their own negligence to regulate, as well as the FCA’s, and commit today to offer the full compensation that victims should have been entitled to.
Secondly, on auditing, London Capital & Finance had only £50,000 of share capital and high leverage in 2016, but its auditors simply waved through its accounts. In 2018, when the firm was all but insolvent, its auditors, astoundingly, had no problem with its accounts. But sadly, as we know, this is not a rare occurrence. BHS, Carillion, Thomas Cook, Patisserie Valerie and many more all sailed through their audits with flying colours despite the horrors lurking beneath. Such scandals required robust action to ensure that they could never happen again, but this Bill does not do that. The Government must therefore set out urgent proposals to address the systemic regulatory failures that this case has exposed in the FCA but also in the auditing industry.
Gareth Thomas (Harrow West) (Lab/Co-op)
I rise to support the Bill, but to suggest that there are wider issues to be considered from the scandal behind it. In particular, I suggest that there are disturbing echoes of Dame Elizabeth Gloster’s report in how the demutualisation of Liverpool Victoria is being considered by the same regulators, and that there is an urgent need to tighten up some major legal loopholes.
The focus of the Financial Conduct Authority’s interest to date in LCF and Liverpool Victoria is very different. LCF was selling, or rather mis-selling, a distinct product. With Liverpool Victoria, the issue is whether it should be allowed to hand over all the capital and assets its British customers have helped it build up over almost 200 years to a privately owned American firm with no commensurate experience, and whether the choices of consumers past and present are being respected. I understand that regulators have had a substantial number of meetings with those pushing the demutualisation, but none with the customers and owners of Liverpool Victoria.
Consumers lost thousands with London Capital & Finance. The customers of Liverpool Victoria also risk losing out significantly. Dame Elizabeth’s report questioned whether policy papers and staff training at the FCA were adequate. In the case of LCF, the inability to detect indicators of fraud was the key driver of her concern, but given that the FCA has made no analysis of what happened during previous demutualisations of financial services businesses—whether customers benefited or lost out; whether customers were presented with fair information and given access to alternative viewpoints—it is difficult to see how staff could be trained to protect the consumer interest properly during a demutualisation. Indeed, all the evidence that has been compiled independently suggests that demutualisations result in worse services for consumers.
It is clear that Dame Elizabeth thought that the FCA was not fit for purpose. It did not protect LCF customers, despite repeated wake-up calls. Similarly, given the complicated nature of financial services businesses, the customers of a financial mutual are not always well placed to make a judgment about whether a vote for a conversion is in their interest; they rely on the advice of others. Customers are not given even-handed information by boards wanting to demutualise—they are certainly not in the case of Liverpool Victoria—to allow them to make an informed decision. The FCA has a critical role, and it needs to exercise a little more robust direction to the board of Liverpool Victoria. Similarly, legislation for friendly societies needs updating so that it properly protects consumers’ assets and ensures that regulators can properly protect consumers during demutualisations.
Jim Shannon (Strangford) (DUP)
I, too, welcome the Bill and very much look forward to its moving forward. Having read the background information and looked back on what happened, I have a couple of questions, although I support the Bill and think it is important that we do so.
The FCA found in the case of London Capital & Finance that it had been
“misleading, not fair and unclear”
in its advertising, and that there had been
“serious concerns about the way the firm was conducting its business”.
For me, it is clear that the FCA at that time failed the investors. At the same time, Dame Elizabeth’s report concluded that
“the FCA did not discharge its functions in respect of LCF in a manner which enabled it effectively to fulfil its statutory objectives.”
We are where we are tonight, and we have a Bill that I hope will address those issues for this particular group of investors. I just ask the Minister whether—the hon. Member for Harrow West (Gareth Thomas) referred to this—in other cases where people have invested similarly and indiscretions and fraud have taken place, they too will be able to benefit from this legislation.
I welcome clause 2, which will give the Secretary of State the power to make a loan to the board of the PPF to enable the payment of compensation to eligible occupational pension schemes following the High Court judgment. That is an essential component of the legislation, as is the fact that it entails the loan being repaid by the fraud compensation fund levy over a period currently estimated to be between 10 and 15 years. We must protect, if we can, the pension schemes and investors through that process and give them peace of mind. The protection of those pensioners is increasingly important to me, as it is to every hon. Member who has spoken in the debate and to the Minister.
I will pose one last question to the Minister, if I may, about those investors who may have passed away without being able to take advantage of this legislation. Will the families of the deceased—those who are no longer here —qualify for the compensation as well?
The Economic Secretary to the Treasury (John Glen)
It is a great honour to speak in this debate and to have worked with the pensions Minister—the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Hexham (Guy Opperman)—to bring forward this legislation. Many Members of this House, if not all, will have constituents who have been affected by the issues that we have dealt with and discussed this afternoon.
I am pleased that the Bill has the support of Members across the House. I have listened carefully to the debate. Observations have been made about the FCA and about the House’s confidence in its conduct; I will seek to address those points and to respond to the important points raised by several hon. Members about the compensation scheme for London Capital & Finance.
Let me begin with the scope of the compensation scheme and what it means in relation to the Government’s approach to future firm failures—a point that the right hon. Member for Hayes and Harlington (John McDonnell) and others raised. The LCF is not the only mini-bond firm that has failed in recent years. The Treasury, in collaboration with the FCA, has examined every mini-bond issuer known to have failed in the past eight years. Following that detailed analysis, the Government are satisfied that the circumstances surrounding LCF are truly exceptional.
As hon. Members may already be aware, the issuance of mini-bonds is not regulated by the FCA. As my hon. Friend the pensions Minister set out, LCF was an FCA-authorised firm despite not receiving any income from regulated activities. LCF is unique in that regard; indeed, it is the only mini-bond issuer that was authorised by the FCA and that sold bonds to on-lend to other companies. That is important, because one of the central findings in Dame Elizabeth Gloster’s excellent report is that because LCF was authorised, the FCA should have considered its business holistically, including the unregulated activity of issuing mini-bonds. The FCA cannot be said to have the same responsibilities with regard to unauthorised firms. Although the Government have not seen evidence to suggest that the regulatory failings at the FCA caused the losses for bondholders, they were a major factor that the Government considered when deciding to establish the scheme.
I pause to acknowledge the representations made by the hon. Members for Strangford (Jim Shannon) and for Kirkcaldy and Cowdenbeath (Neale Hanvey) and by my hon. Friend the Member for Leigh (James Grundy). I will set out in due course, in the coming months, the details of how the scheme will operate. I am very happy to take correspondence on individual cases, but I think it would be inappropriate to try to address at the Dispatch Box this evening every single case raised. However, I have received and read many letters from individuals who have lost money after investing in LCF and other failed mini-bond firms, including Blackmore Bond and Basset & Gold, which were raised in the debate.
I sincerely extend my sympathy to all those affected, as I know that many individuals have suffered financial hardship—severe financial hardship, in many cases—as a result of their investment losses. However, I must be clear that the Government cannot step in to pay compensation in respect of every failed financial services firm. That falls outside the financial services compensation scheme, would create a moral hazard for investors and would potentially lead individuals to choose unsuitable investments, thinking that the Government would provide compensation in all cases if things went wrong.
The Government’s approach follows the historical precedent. I note that only three compensation schemes have been established in the past 35 years—for Barlow Clowes, a Ponzi scheme that failed in the late 1980s, Equitable Life and LCF—despite many investment firms failing over that period. The Government are also seeking to ensure that the situation never arises in the future. In April, we launched a consultation with proposals to bring mini-bonds into FCA regulation.
The right hon. Member for Wolverhampton South East (Mr McFadden) asked a number of questions about the Government’s confidence about the FCA’s capability. As the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Hexham mentioned, the transformation programme that the new chief executive, who has been in post for just over eight months, is undertaking at pace is designed to empower the organisation at all levels to hear the representations that the right hon. Member for Wolverhampton South East made, to act on them, and to deal proactively with the cases that are raised.
Gareth Thomas
It is encouraging to hear the Minister’s confidence in the transformation programme. Given the concerns that consumers might lose out in the demutualisation of Liverpool Victoria, will he sit down with the new chief executive of the FCA and go through how the FCA will ensure that consumers’ interests are properly protected if that demutualisation goes ahead?
John Glen
I thank the hon. Gentleman, as ever, for his representations. He has been a determined campaigner for that sector during my tenure. I have regular conversations, at least every six weeks, with the chief executive of the FCA, and we discuss a whole range of matters. I would be very happy to discuss that matter with him when I next speak to him in the next few weeks.
As Members from across the House have recognised today, the measure concerning a loan to the board of the Pension Protection Fund, set out in clause 2, is vital to ensure that those defrauded of their pensions by scam pension liberation schemes are able to access the compensation that they deserve. The Bill will ensure that those whose pensions have been unjustly targeted by fraudsters receive their pensions. We must continue to provide a safety net for people across the UK, who deserve to have confidence that they will have a pension pot for their retirement. I note that a number of observations were made about the ongoing challenge of dealing with the evolving nature of financial services firms and the sophistication of scams. The Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Hexham, and I are working across Whitehall to bring an effective resolution to this matter.
I acknowledge that Members from across the House have supported the principles of the Bill, and I welcome the support that it has received. It will offer some relief to the enormous distress and hardship suffered by LCF bondholders and victims of fraudulent pension liberation schemes. It is an important Bill, and I want to move as quickly as possible from Royal Assent to enact it and deliver that compensation. I hope that right hon. and hon. Members will support it this evening.
Question put and agreed to.
Bill accordingly read a Second time.
Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (Programme)
Motion made, and Question put forthwith (Standing Order No. 83A(7)),
That the following provisions shall apply to the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill:
Committal
The Bill shall be committed to a Public Bill Committee.
Proceedings in Public Bill Committee
(2) Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Thursday 17 June.
(3) The Public Bill Committee shall have leave to sit twice on the first day on which it meets.
Proceedings on Consideration and Third Reading
(4) Proceedings on Consideration shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which proceedings on Consideration are commenced.
(5) Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.
(6) Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and Third Reading.
Other proceedings
(7) Any other proceedings on the Bill may be programmed.—(Alan Mak.)
Question agreed to.
Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (money)
Queen’s recommendation signified.
Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),
That, for the purposes of any Act resulting from the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill, it is expedient to authorise the payment out of money provided by Parliament of:
(a) expenditure incurred by the Treasury for, or in connection with, the payment of compensation to customers of London Capital & Finance plc; and
(b) loans by the Secretary of State to the Board of the Pension Protection Fund.—(Alan Mak.)
Question agreed to.
Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (ways and means)
Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),
That, for the purposes of any Act resulting from the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill, it is expedient to authorise such levying of charges under section 189 of the Pensions Act 2004 and Article 171 of the Pensions (Northern Ireland) Order 2005 as may arise by virtue of that Act.—(Alan Mak.)
Question agreed to.
Madam Deputy Speaker (Dame Rosie Winterton)
I will now suspend the House for two minutes to make the necessary arrangements for the next business.
Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (First sitting)
Tuesday 15th June 2021
(3 years, 6 months ago)
Public Bill CommitteesRead Full debate Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 15 June 2021 - (15 Jun 2021)
The Chair
We are now sitting in public and the proceedings are being broadcast. Before we begin, I have a few preliminary announcements to make. Members will understand the need to respect social distancing guidance and, in line with the Commission’s decision, face coverings should be worn in Committee unless Members are speaking or are medically exempt. Hansard colleagues will be grateful if Members could email their speaking notes to hansardnotes@parliament.uk. Please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Following a request from a Member, gentlemen will be permitted to remove their jackets. Date Time Witness Tuesday 15 June Until no later than 10.15 am Financial Services Compensation Scheme; Financial Conduct Authority Tuesday 15 June Until no later than 10.45 am Pension Protection Fund Tuesday 15 June Until no later than 11.25 am The Rt. Hon. Dame Elizabeth Gloster DBE, PC; Dechert LLP; Transparency Taskforce; B&CE
Today, we will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication and a motion to allow us to deliberate in private about our questions before the oral evidence session. In view of the timetable available, I hope we can take these matters formally without debate. I now call the Minister to move the programme motion in his name and that was discussed yesterday by the Programming Sub-Committee.
Ordered,
That—
(1) the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 15 June) meet—
(a) at 2.00 pm on Tuesday 15 June;
(b) at 11.30 am on Thursday 17 June.
(2) the Committee shall hear oral evidence in accordance with the following Table:
(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 1.00 pm on Thursday 17 June. —(John Glen.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(John Glen.)
Resolved,
That at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(John Glen.)
The Chair
Before we hear from the witnesses, do any Members wish to make declarations of interest in connection with the Bill? I take that as a no.
I remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timing in the programme motion. The Committee has agreed that we have only until 10.15 am for this session. Will the witnesses please introduce themselves for the record?
Sheree Howard: Good morning. My name is Sheree Howard and I am the executive director of risk and compliance oversight at the Financial Conduct Authority.
Robin Jones: Good morning. I am Robin Jones and I am a director within the risk and compliance oversight function of the FCA.
Simon Wilson: Good morning. I am Simon Wilson, the interim head of resolution at the Financial Services Compensation Scheme.
Casey McGrath: Good morning. I am Casey McGrath, head of legal at the FSCS.
James Darbyshire: Good morning. I am James Darbyshire, chief counsel and a member of the executive team at the FSCS.
Mr Pat McFadden (Wolverhampton South East) (Lab)
Q
Simon Wilson: Thank you for the question. If it is okay, I will pass it over to my colleague, James Darbyshire.
James Darbyshire: It is difficult to put a figure on the extent of pension mis-selling going on at the moment. We are certainly seeing an increase, and certainly an increase through the covid crisis. It is important to make it clear that there is a clear distinction between the two compensation schemes. Here at the FSCS it is triggered in relation to authorised firms that go bust and regulated activities, whereas the fraud compensation scheme is triggered by dishonesty in occupational pension schemes. There will be differences, but the mis-selling we see is through authorised financial advisers as well as unregulated firms.
Mr McFadden
Q
James Darbyshire: The typical cases of mis-selling that we see at the FSCS involve scenarios in which somebody has been misadvised to transfer from a vanilla pension into a self-invested personal pension and, within that, invest in illiquid, esoteric and high-risk investments. Sometimes there is a fraud element as well, but they are certainly very high risk and often lead to that person losing all their pension savings. That is our most typical scenario.
Mr McFadden
Q
James Darbyshire: We are triggered because a regulated firm is involved, so there is an adviser who has mis-sold. But we have also seen an increase in pure scams, if we can call them that, that relate to investments that have been advertised through search engines. They are scams and not genuine investments. As part of the FSCS’s strategic role for prevention and our strategies for the 2020s, we are identifying those kinds of scams and ensuring that we pass the information, data and insights that we see on to the relevant enforcement agencies so that they can take action. We work very closely with the FCA and last year, for example, we signed a memorandum of understanding with the Serious Fraud Office to ensure that we share information in the right way.
Mr McFadden
Q
Sheree Howard: Thank you for the question. Obviously you are correct that Dame Elizabeth Gloster undertook a very thorough and detailed investigation and produced a detailed report. It has identified a range of issues and mistakes that the FCA made, for which we are profoundly sorry. We know that it has had a devastating impact on many people.
We embarked on a range of initiatives and interventions as a result. We have done a significant amount of work on mini-bonds, in particular, and on other high-risk investments in the investment space and financial promotions arena. Actions are under way in all of them: some are closed, some are ongoing and some will take some time to be sustainable and to embed.
Financial firms do fail due to a variety of circumstances. We are investing heavily in an ongoing transformations programme, but can I give you an absolute assurance that something will not happen again? Sitting here today, I cannot give that absolute assurance, no.
Mr McFadden
Q
Sheree Howard: A significant range of action has already been undertaken and is still under way to ensure that we make the embedded change that makes the FCA fit for the digitised future. A huge amount has been done. If you are asking whether we have changed, for example, our approach to financial promotions, we now escalate much earlier—we have a much clearer escalation process with a clear route through it. We have changed policies—for example, our contact centre policy—around areas highlighted in Dame Elizabeth’s report.
Mr McFadden
Q
Sheree Howard: Dame Elizabeth Gloster’s report outlined the circumstances and nature of the changes that occurred at the time that consumer credit was transferred from the OFT to the FCA in 2014. The report is clear about the state of supervision within the FCA at that point and the changes that were implemented by the then executive members of supervision and others in the light of issues that they identified when they came into the organisation. It was a very substantial change of responsibilities, and it came from a regime where there was not a supervisory regime.
Mr McFadden
Q
Sheree Howard: I was not in the FCA at the time, but it was a very large assumption of remit. We have changed systems. We have implemented various programmes highlighted in Dame Elizabeth’s report on delivering effective supervision and effective authorisation programmes.
As I have already outlined, the financial services market is not sitting still; the FCA cannot sit still—hence the changes that are under way and will be a fact of life going forward. We are undertaking a significant programme to ensure that we invest in digital and data and have much greater access to the information, given the quantum of firms that we oversee.
Peter Grant (Glenrothes) (SNP)
Q
James Darbyshire: I don’t think it would cause administrative difficulties; it would just mean an additional area of coverage for the FSCS. The cost to levy payers—to the financial services industry—would potentially go up, depending on whether there were any failures involving mini-bonds.
Peter Grant
Q
Simon Wilson: Unfortunately, I cannot give an accurate figure, but I would be happy to look it up and come back to the Committee.
Peter Grant
Q
Simon Wilson: We certainly get calls and contact from our customers regarding investments that they made that we are unable to protect—that is correct.
Peter Grant
Q
Sheree Howard: I will look to my colleague Robin in a moment, but Dame Elizabeth Gloster’s report highlighted the halo effect that occurred in LCF. It was unique as it was an authorised firm issuing mini-bonds, which are not regulated although the firm was authorised for other activity but was not undertaking regulated activity.
On whether unsophisticated customers understand that, we are seeking ways of working with our partners to enhance that understanding. There is certain information on that in the financial services register, but people who invest little may not understand that, so it is an area of focus for us, including thinking about how we might most effectively act against that halo effect. That includes strengthening our gateway—our authorisations process—implementing a nursery, where we look at firms shortly after to ensure that they operate in line with our norms and standards. We are looking to do that as part of our transformation programme, as well as considering legislative routes that might help—for example, not having the logo and the FCA name.
The Chair
May I ask witnesses to keep their responses as short as possible so that we can get in more questions from Members? Mr Grant, will you make this your final question, please?
Peter Grant
Q
Ms Howard, another major problem has been not the unregulated activities carried out by regulated organisations, but unregulated companies that hide behind the fact that some company associated with it is regulated—for example, if a regulated company gives section 21 authorisation for its marketing materials. I will ask the same question again: do the people being encouraged to make these investments understand that the fact that marketing material is issued by a company registered with the FCA does not mean that its activity is regulated?
Sheree Howard: In evidence as part of LCF there was substantial discussion of the financial promotions regime—of the section 21 approval regime in particular. The Government are currently considering changes to that regime to help to improve understanding by making it a specific gateway so that we can test firms that wish to give such approvals to ensure that they do so appropriately. That should help to ensure that consumers understand better.
Matt Rodda (Reading East) (Lab)
Q
The Chair
May we ensure that questions are in scope of what is before us? You have only three to four minutes.
Matt Rodda
I will move through them rapidly.
To what extent do the witnesses believe that pensions scams are a tangible risk to the future of people’s retirement in the UK?
James Darbyshire: The FSCS is seeing an increase in pensions scams in our work. The area certainly needs further attention, given the distress and the potential for losing life savings. Where we see evidence of scams, particularly use of the FSCS logo, we are working closely to reassure pensioners in relation to scam investments and are sharing data with regulatory colleagues to ensure that they can take action as appropriate.
Matt Rodda
Q
James Darbyshire: Focusing specifically on scams, we think that online scams and the ability to scam investors and pensioners should be considered for inclusion as part of the online safety Bill. That is certainly our position, and I believe it is also the FCA’s.
Matt Rodda
Q
Sheree Howard: Picking up on James’s final comment on the online harms Bill, we definitely would support that. Good changes have been made recently, but further changes would be helpful in mitigating the risk of scams and fraud in pensions and investments. We have our ScamSmart campaign and have done targeted campaigns around it. We work with partners, as James said. Could more be done? Yes, more could be done, such as the online harms Bill, education and so on. We are working with partners, but more could be done.
The Chair
Thank you. I call Richard Fuller, who has five minutes. I remind hon. Members please to keep their questions within the scope of the Bill.
Richard Fuller (North East Bedfordshire) (Con)
Q
James Darbyshire: That really is a question of judgment for the Government and Parliament in relation to the impact on the Bill. The FSCS’s role is simply to administer the Government’s redress scheme as efficiently and effectively as possible. We are committed to paying compensation to eligible investors within six months of the scheme going live.
Richard Fuller
Q
James Darbyshire: The balance between consumer protection and consumer responsibility is a delicate one. Ultimately, that is a policy question that has to come from the Government and through the FCA. In our role, we are focused on ensuring that consumers can make decisions in a way that they are as informed as possible about whether there is FSCS protection for particular products. That is critical to the way they make decisions. For example, at the moment we have a comms campaign about pensions and investments, to make sure that consumers are checking whether they are covered when they make those decisions.
Richard Fuller
Q
Sheree Howard: I will pass that on to Robin, if I may.
Robin Jones: Of course. The first thing to say is no, the Government stepping in in this particular scenario most certainly does not affect the FCA’s commitment to effective regulation, and to making the changes that Sheree set out. As the Government have already noted and the Economic Secretary to the Treasury has highlighted, this is only the third time that such a scheme has been set up in the recent past. It is exceptional and unique. We are not expecting it to be happening on a regular basis.
At the FCA we have accepted all the recommendations of Dame Elizabeth’s report, and Raj Parker’s report into Connaught. We are now taking a number of steps to respond to that. We have steps that we are taking this year. As we have highlighted, our new chief executive, Nikhil Rathi, has a significant transformation programme in place and has brought in a range of external executive directors to lead that change and to bring an operational excellence focus to the changes that are needed in the organisation. I do not see this scheme and the Government stepping in, in unique and exceptional circumstances, as creating any risk of diverting our focus.
Gareth Thomas (Harrow West) (Lab/Co-op)
Q
Sheree Howard: Could I ask for clarification? Are you asking about during the time that LCF was in operation, or subsequently?
Gareth Thomas
First, during the time that LCF was in operation.
Sheree Howard: I am not aware of any, but I would need to go and check that.
Gareth Thomas
Q
Sheree Howard: I think there has been, but I would need to go and check the details on that and get back to the Committee separately, if that is okay.
Gareth Thomas
Q
Sheree Howard: As part of our transformation programme, we are considering our approach to consumer engagement and what that looks like, recognising some of what we have seen here and making sure that we are serving the UK public in the best way we can, both through information provision and by ensuring that their voices are heard.
Gareth Thomas
Q
Sheree Howard: Our focus initially would be to gather that intelligence and use it as quickly and urgently as possible to act against whatever has been raised. That would be our primary focus—making sure that we gather as much evidence or intelligence from them as we can.
Gareth Thomas
Q
Sheree Howard: I am sure we would consider it. From my perspective, of course we want to listen to them, and we would offer to meet them, if they wish to.
Gareth Thomas
Q
Sheree Howard: For the businesses that we regulate, authorise and supervise, yes, we would. As I said, we would take it into consideration and—potentially do what we do with whistleblowers, for example,
Gareth Thomas
Q
Sheree Howard: I think I ought to clarify. Obviously, meeting with lots of individual consumers would take a very significant amount of resource. We do meet groups of consumers on occasion to hear concerns. We meet lobby groups, consumer networks and things like that, to hear those consumer voices. We obviously also have a consumer panel, so we meet ranges of consumer representatives in a number of circumstances. If you are asking me whether we would meet every consumer who phones up or who asks to phone up, that would be slightly more difficult. We do on occasion—for example, under the complaints scheme—meet a consumer who has a complaint, if that is the best way for them to get their concerns across. It is very individual and depends on the circumstances.
Gareth Thomas
Q
Sheree Howard: In any initiative we are very focused on its operationalisation. When a paper comes through, we are very focused on what would happen once that policy goes live—our ability to supervise through it and how it would be implemented in the organisation to make sure it is as effective as it can be.
Gareth Thomas
Q
Sheree Howard: I am aware that the FCA has met you about this area. I am very conscious that there will be future discussion between the EST and our CEO Nikhil Rathi on that matter. We have clear guidance about how we handle part VIIs and the role of the independent expert in those, which LV would go through if it went through a demutualisation process.
Gareth Thomas
Q
Sheree Howard: I will find what we have and send it to you.
The Chair
Ms Howard, you responded to Mr Thomas’s first question by saying that you would write to us. May I point out to you that you must write your response to both questions today? Minister Opperman, do you have any questions?
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
You are very kind, Chair, but I do not.
The Economic Secretary to the Treasury (John Glen)
No, I do not, thank you.
The Chair
That brings us to the end of this session. I thank all the witnesses for giving evidence.
Examination of Witness
David Taylor gave evidence.
The Chair
We will now move on to oral evidence from David Taylor, general counsel at the Pension Protection Fund. We have until 10.45 am for this session. Could the witness please introduce himself for the record?
David Taylor: I am David Taylor, executive director and general counsel at the Pension Protection Fund, which also runs the Fraud Compensation Fund.
Mr McFadden
Q
David Taylor: Absolutely. We have the power to set the levy up to limits set out in legislation. Since we got clarity on the eligibility of scam schemes for compensation in the last year, we have raised the levy to the maximum we can at the moment. That is 75p per member for schemes in general, and 30p per member for master trusts. Any change to those maximum levels is a legislative matter that the Government plan to consult on in the autumn.
Mr McFadden
Q
David Taylor: Our role in relation to this is, as you say, as the backstop to pay compensation in the particular circumstances where there is a pension scheme that has been defrauded, or where money has been lost from the scheme due to dishonesty. The sorts of cases that we are talking about here, and for which the loan will be required, are actually predominantly historical in nature. As you will no doubt hear from other witnesses, there have been a number of measures since then that have tightened up in various respects and mean that cases like the ones we are talking about here are less likely to happen in the future.
Mr McFadden
Q
David Taylor: The Fraud Compensation Fund has been in existence since the main Pension Protection Fund was set up in 2004-05, but it has actually had relatively few claims on it prior to this raft of pensions liberation cases. I believe you will be hearing later from the transparency taskforce, which very helpfully flagged to us that information on the Fraud Compensation Fund was not perhaps as successful as it could be. We have taken various steps to increase visibility. We are in the process of creating a separate website for the Fraud Compensation Fund, where it is very straightforward for members to find information about how the fund works. For the sorts of members we are talking about, their first port of call is also the scheme trustees or professional trustees who have been put in place by the Pensions Regulator and who will be able to keep them posted as to where their applications have got to.
Peter Grant
Q
David Taylor: From the point at which an application is made to us, through to our making a payment into the scheme, we would estimate that it takes somewhere between six and 18 months to process that application and establish whether the various necessary tests have been satisfied, particularly a loss to the scheme due to dishonesty, and whether all other avenues for redress have been exhausted, because we are the fund of last resort. Once the application comes to us, it is relatively quick. However, in relation to the schemes that we are talking about here, people have been waiting for some time as a result of the uncertainty about the eligibility of those schemes for FCF compensation.
Peter Grant
Q
David Taylor: The way that these cases typically work is that when they become known, the Pensions Regulator appoints a professional trustee to manage the case and to seek to bring in any assets that they can, any claims against the wrongdoers and so forth. The information that we have on the amount of claims is based on information that we have gleaned to date from the professional trustees and/or the Pensions Regulator. We have been liaising with them for some years in relation to these cases.
Inevitably, it is not until they make their formal application to us and provide us with all the documentation that we can really get into the numbers, so we have greater certainty about the numbers that have already applied, perhaps slightly less certainty about the longer-term pipeline.
I think it is fair to say that, based on everything that we have done to date, we are reasonably confident about the order of magnitude of the claims that we know about. There is no legal reason why we could not get more claims in future, so I cannot say, no, that number is not going to go up. For the reasons I mentioned earlier, about these claims not being so relevant anymore, we would perhaps be slightly surprised if it went up a great deal.
Matt Rodda
Q
David Taylor: Our role relates to paying the compensation at the end of the process. The cases we are talking about here almost entirely predate pension freedoms. The reasons for the liberation cases have gone away to an extent, as a result of pension freedoms. There is not a great deal that would be appropriate for me in my role to talk about pension freedoms.
Matt Rodda
Q
David Taylor: We have almost no discretion in how the Fraud Compensation Fund levy is set. Members will probably be familiar with the Pension Protection Fund levy, the much larger levy on defined benefit schemes, where we have a lot of discretion and we do a lot of work on structuring that levy. As far as the Fraud Compensation Fund levy is concerned, it is simply a flat-rate levy. Our only choice is whether to charge the maximum amount or less. In the light of the size of the claims we are now dealing with, we will charge the maximum for the foreseeable future.
Matt Rodda
Q
David Taylor: Again, that is slightly outside our remit but we are, of course, well aware of the debate around the fact that it is a per-member levy, and the representations made by master trusts, in particular, on the impact that has where they manage numerous small pots.
Richard Fuller
Q
David Taylor: Like a number of other systems, the Fraud Compensation Fund was set up to be an industry-funded system. Our role in this is simply to administer that system and it has become apparent that, in order to deal with the cases that are eligible, more money will be needed. As I understand it, the plan is to maintain the system of industry funding and the Government will be consulting in the autumn on any changes to the levy rates.
Richard Fuller
Q
David Taylor: Yes, that is true.
Richard Fuller
Q
“The FCF is funded by a levy on eligible pension schemes and at the time of the judgment had assets of £26.2m. Even with future levy income, the expectation is that there will be unfunded liabilities in the region of £200m to £250m.”
Is it your expectation that the Government’s consultation later in the year will be about resolving that funding shortfall or that, with current resources, over an acceptable horizon, that funding shortfall can be reduced?
David Taylor: I will pick up on a couple of points there. To go back to the question of how big the shortfall is, as I said earlier, those numbers are based on our best current estimate of the claims that will come in. As for how that shortfall is then funded, the loan that we are talking about and that the legislation enables will effectively resolve the cash-flow issue while we make the payments. As I understand it, the plan is that it will be reimbursed through the fraud compensation levy. In terms of what the levy is, there is a balance to be struck between the level at which the levy is set and the period over which we are required to pay the money back to Government.
Gareth Thomas
I apologise, Ms Ghani. I mis-spoke earlier; it is probably a lack of practice. My questions actually relate to the third group rather than this one.
Guy Opperman
Q
David Taylor: That is right. The types of cases that we were dealing with in the early years of the Fraud Compensation Fund were different. They did not involve schemes that had been set up specifically for the purpose of pensions liberation. They were more to do with, for example, employers who had failed to pay over into a scheme the moneys that they had deducted from their employers or conceptually straightforward fraud by which money was taken out of existing defined contribution or DB pension schemes.
Guy Opperman
Q
David Taylor: That is correct.
Guy Opperman
Q
David Taylor: That is right. There have been a couple of changes over the years.
Guy Opperman
Q
David Taylor: That is right, yes.
Guy Opperman
Q
David Taylor: Yes, we do. We are just about to publish our report for the year finishing 31 March 2021. It is quite comprehensive and is audited by the National Audit Office.
Guy Opperman
Q
David Taylor: It does, and I anticipate that there will be far more activity on the Fraud Compensation Fund in the year to come than there has been in previous years.
The Chair
If there are no further questions from Members, I shall thank the witness for his evidence. We now move on to the next panel.
We seem to be struggling to get all the witnesses on Zoom, so I will suspend the sitting until 10.45 am.
The Chair
We will now hear oral evidence from the right hon. Dame Elizabeth Gloster, Dorothy Cory-Wright and John Bedford of Dechert LLP, Andy Agathangelou—forgive me if I have mispronounced your name—and Mark Bishop of Transparency Task Force, and Philip Brown of B&CE. For this panel we have until 11.25 am. Could the witnesses please introduce themselves for the record? Let’s begin with Andy Agathangelou.
Andy Agathangelou: Thank you. I am the founder of the Transparency Task Force, which is a certified social enterprise. I should also mention that I am the chair to the secretariat to two all-party parliamentary groups: the all-party parliamentary group on pension scams and the all-party parliamentary group on personal banking and fairer financial services.
Mark Bishop: I am Mark Bishop, a strategy adviser working with Transparency Task Force, particularly in the areas of organisational strategy, public affairs and helping the victims of financial services misconduct and regulatory failure.
Philip Brown: Good morning, I am Philip Brown, director of policy and external affairs and B&CE, providers of the People’s Pension. We are one of the UK’s largest pension schemes, serving the automatic enrolment market. We have 5 million members, nearly £15 billion of assets and serve nearly 100,000 employers.
Dame Elizabeth Gloster: Hello, I am Liz Gloster, I was appointed by the FCA at the direction of the Treasury to investigate the FCA’s regulation of London Capital & Finance. Assisted by my team at Dechert and barristers, we produced our report last November. I currently sit as an arbitrator in international commercial arbitration.
Dorothy Cory-Wright: I am head of disputes and contentious regulatory in the law firm of Dechert. As you just heard, we supported Dame Elizabeth in her investigation, and I led the team from Dechert.
John Bedford: I am John Bedford, I am a partner at Dechert LLP in London, and I was part of the team supporting Dame Elizabeth with her report.
The Chair
I thank all the witnesses for giving evidence today. I urge them to keep their answers short so we can get through all the Members who wish to contribute. I call the shadow Minister, Pat McFadden.
Mr McFadden
Q
Dame Elizabeth Gloster: It is probably set out in the executive summary of my report, in chapter 2. I think the biggest lesson that should be taken away is that there has to be a cultural change at the Financial Conduct Authority in order to ensure that the FCA is able to regulate in accordance with its obligations in a digitalised world.
Mr McFadden
Q
Dame Elizabeth Gloster: Let me make it clear, as I think I did in my letter to the Committee, that I only looked—and was only instructed to look—at the regulation of LCF. I did not look at the regulation of other firms that may or may not have been similar. Having said that, some of the criticisms my report made could potentially apply to other firms. First, for example, the restricted approach to the regulatory perimeter when dealing with authorised firms; secondly, the failure to consider LCF’s business holistically in the application, variation and the regulation supervision processes; and thirdly, the absence of training that we pointed to of those employees at the FCA who had to review financial material. Those are all three failings that potentially could apply to other businesses.
Mr McFadden
Q
Dame Elizabeth Gloster: The gap we identified—I would be grateful if John or Dorothy could direct me to the particular chapter in my report—was that neither the FCA, nor HMRC, at any time checked on or seemed to conduct any analysis of, either as part of a regulatory or a taxation process, whether or not the product being flogged to the investors was ISA compliant. John, do you have the chapter?
John Bedford: Yes, Dame Elizabeth. It is chapter 14, page 303 of your report.
Dame Elizabeth Gloster: Thank you. The fact that LCF bonds could be acquired in an ISA wrapper was absolutely critical to attracting investment because bondholders believed that the ISA status indicated that LCF’s products were subject to an additional level of regulatory security and assurance. Once LCF got its approval, and marketed its bonds as ISA-eligible, the sales significantly increased. That was our concern—this gap with neither the FCA nor HMRC actually looking at the question—and was something that should be addressed.
Mr McFadden
Q
“LCF is the only mini-bond firm that was authorised by the FCA and sold bonds in order to on-lend to other companies.”—[Official Report, 8 June 2021; Vol. 696, c. 905.]
My question is whether the case of LCF is unique and, if not, why not?
Mark Bishop: Shall I take this one? If you look at what the Minister said, then no doubt it is unique. I am not aware of any other situation where there is a regulated product being sold by an authorised firm who is conducting literally no regulated business, and is also allowed into an ISA. Those are exceptional circumstances.
However, if you look at the many other financial services scandals that have occurred where regulatory failure is either proven, as in the Connaught case, or is alleged with very good reason, they all have exclusive and specific circumstances. I think the question for this Committee is whether you want to use the opportunity of this Bill to create a right for consumers—with a high bar—to have their claims for compensation considered, where they are able to demonstrate significant regulatory failure and that that failure has led to loss.
Peter Grant
Q
Dame Elizabeth, may I come to you first? You will be aware that there are amendments that the Committee will consider later that ask for the Secretary of State to be required to report various things to Parliament. In particular, one amendment asks for a report within six months on progress towards the implementation of the recommendations in your report. Clearly, not all of the recommendations will be implemented within six months, but in your view what would be a reasonable time scale for Parliament to ask the Secretary of State to come back and give us an update as to what had been achieved by that point?
Dame Elizabeth Gloster: Thank you for the question; I don’t think I am really qualified, in terms of parliamentary process, to answer it. What I can say is that it was a matter for the FCA to determine how it responds to my recommendation, and my report specifically said that any such response should involve an assurance exercise to confirm that any of the steps, whether recommended by me or otherwise, to cure the defects in the regulation process have indeed achieved the desired objective.
I believe that implementation of my recommendations should be closely monitored, but I don’t really have a view as to whether that means the Secretary of State should be required to lay a report before Parliament, or, if they are, within what timescale. There may be other ways of monitoring progress in relation to the implementation of my recommendations, such as via the Treasury Committee or otherwise.
I think that is the best answer that I can give you.
Peter Grant
Q
Dame Elizabeth Gloster: I would hope so, but I am not saying that in an informed way. Nevertheless, since the FCA has had my recommendations, as indeed has the Treasury, for some months how, I would hope that they are cracking ahead with implementing the recommendations right now. I suspect that the answer to your question is probably “Yes, it would be reasonable”.
Peter Grant
Q
Dame Elizabeth Gloster: Well, I am a lawyer, so I can define anything, I suspect—[Laughter.] At the time, mini-bonds were not defined and nobody really knew what was being referred to. But, yes, of course you can define a bond that has particular attributes and define it as a mini-bond. It is a slightly open-ended question, but I would have thought that the answer is yes, you can define a bond with particular attributes that might or might not attract protection.
I do not know whether either of my colleagues want to come in on that answer.
Peter Grant
I can see on the screens that they are shaking their heads, so we will take that as a “no”. For the record, I do not know whether the camera showed this, but one of the lawyers on the Committee was jumping for joy and waving his arms about when you announced, Dame Elizabeth, that a lawyer can define anything when asked to do so. You have one friend on the Committee.
Dame Elizabeth Gloster: I am not expecting people to agree with that comment; it was only a frivolous comment.
Peter Grant
Q
Andy Agathangelou: I certainly do agree. The reason I agree is because there is a mountain of evidence suggesting that there are many similar cases to LCF—Connaught, Lendy, FundingSecure, Blackmore Bond, Exmount, Bentley Global, Store First, Park First, Premier FX, Woodford.
We have to ask ourselves one fundamental question: do we want the public to have good reason to have trust and confidence in our financial ecosystem? If the answer is yes, it follows that we must also want the public to have confidence and trust in the financial regulatory framework that oversees it. Unless we get to that point, we cannot have what we want, which is a system that we can all rely on.
I would argue very strongly indeed that we must look at, for example, Blackmore Bond. The evidence is crystal clear that there has been catastrophic regulatory failure. We need to do what is uncomfortable and open up the can of worms that is there, and the can of worms that is within Premier FX. We need to have the courage to recognise that things have gone wrong. We do not need to make it in any way personal—this is a systemic issue. We will only start addressing these problems if we move away from short-term, tactical, reactive responses to long-term, strategic, proactive responses. I and the many members of our organisation would be very pleased if Parliament were to decide to properly investigate the many other catastrophic regulatory failures that have taken place.
The Chair
I ask witnesses to make sure that you are on mute if you are not speaking, and to keep answers short. Mr Grant, is this your final question?
Peter Grant
Q
Mark Bishop: Yes. I strongly endorse what my colleague Andy Agathangelou said and I would like to add a little more information.
As far as I am concerned, the debate is about what happens when the regulator fails in its statutory duty to protect consumers. There are a number of options. The consumers can bear the costs, and that is tough; the consumers can be compensated by the Treasury; or they can be compensated by the FCA.
At the moment, there is no effective route to be compensated by the FCA, because in the Financial Services Act 2012, Parliament—rightly or wrongly—gave the FCA broad exemption from civil liability. It is almost impossible to sue. There is a very narrow carve-out on breach of human rights and acting in bad faith. At some point, someone is going to try the human rights angle, but I do not think anyone has successfully done so yet, because the costs are high and the FCA effectively has unlimited resources.
Knowing that it gave that exemption, Parliament also created a complaints scheme. Unfortunately, it then allowed the FCA to specify the complaints scheme. As a result, the FCA has determined that it cannot give out material levels of redress and it cannot give out any redress where there is an allegation that the regulator has failed in its statutory duty—it has been negligent or it has just not done the job properly. In effect, there is no route for consumers to receive redress. There is a need to create one.
There are big ways of doing that, such as having a royal commission, as happened in Australia. There are also simple, pragmatic, quick ways of doing it. Modifying the Bill so that it could deal with other legacy cases of regulatory failure would be a very sensible way to do it.
Matt Rodda
Q
Philip Brown: Yes, of course. Fraud is a serious issue and people should have a route to redress, as has been said by other witnesses. The challenge is how you pay for that redress.
The current levy system was created a long time ago, before master trusts existed. The People’s Pension is a master trust and a not-for-profit organisation. If a levy is put upon us, it comes from our members’ savings—from the savers we are trying to help create pensions.
The challenge we have with the current system is that it works on a member basis. Between ourselves and NEST, as the two very large master trust schemes, we paid approximately 37% of the Fraud Compensation Fund levy the last time it was taken, in 2019. That is a significant amount of money. At the time, the levy raised £6.9 million.
If we are going to raise a levy using the same mechanism, the current estimate is £350 million. The proportion of that that falls on the two schemes that I referred to is very significant, and it needs to be put in the context that, between those two schemes, we have roughly 1% of the assets in the sector, so there is a very disproportionate effect of how the current levy system works. A fundamental review is necessary for how levies are calculated.
Matt Rodda
Q
Philip Brown: Yes, absolutely. Between ourselves, the People’s Pension and NEST, we are serving the small and medium-enterprise end of the market. Those savers are all relatively new to pensions, so they have modest funds, and it is a very disproportionate effect if you are taking roughly 37% of the fees from those organisations.
Matt Rodda
Q
I wonder whether I might ask Dame Elizabeth a short question as well. In your view, Dame Elizabeth, should there be a wider explanation of the rights of consumers in relation to the regulatory failure that we have heard about today?
Dame Elizabeth Gloster: I am not sure I understand the question. What do you mean by “a wider explanation”?
Matt Rodda
Exploration, sorry. Should there be a wider exploration of this issue?
Dame Elizabeth Gloster: I am not sure what you are suggesting. Do you mean the regulatory failures in connection with LCF or more widely?
Matt Rodda
Q
Dame Elizabeth Gloster: I do not think that is something that I am qualified to comment on. I did my report. The problem about wider reviews is that they need to focus, as my report did, on a specific case and specific facts. The idea of a judicial commission looking at all the financially regulated firms that have gone bust in the last two years—I am not sure what it would achieve beyond the failings that I have identified in my report. It might identify other failings, or it might not, but I do not know that my answer is a very informed answer to that.
Matt Rodda
Q
Finally, I want to turn to Mr Agathangelou—I apologise if I have mispronounced your name. You talked about catastrophic failure across the system. I am particularly interested in the issue of pensions, and obviously we are talking about the wider financial services system. I wonder whether you might comment on the scale of the problems in the pensions sector on its own.
Andy Agathangelou: As it happens, most of my career has been connected to the pensions sector. To know that the issue is very widespread, you only have to look at the report produced by the Work and Pensions Committee as a consequence of the excellent investigation that it had into the pension schemes problem. There is a long list of recommendations in that report. Most, if not all of them, are very warmly supported by the Transparency Task Force.
Unfortunately, the trajectory is worsening. The problem we have is widespread regulatory failure leading to catastrophic losses for people—sometimes literally life-changing losses—and sometimes extreme emotional harm as well as financial considerations. The problem is getting worse. I genuinely believe that the only way we are going to have a chance to deal with these issues systemically is if there is a high-level, widespread investigation into what is going wrong. I believe that could be carried out it a very constructive way. It is not about apportioning blame; it is about having very honest conversations about what is actually broken here and the most pragmatic ways to solve it.
The Chair
I now call Mr Gareth Thomas. You will be pleased to know the witnesses are with us until 11.25 am, Mr Thomas.
Gareth Thomas
Q
Dame Elizabeth Gloster: I do not think I am in a position to do that for this reason: I produced my report and recommendations. I presented to the new chief executive officer at the FCA, to some of his senior staff and to the non-executive directors. As you know, the FCA at all levels has accepted the recommendations in my report. It has said that it is addressing the problems but my team and I have not been tasked—I say that thankfully, I think—to go in and conduct a subsequent audit of whether our recommendations have, indeed, been implemented, so that what we identified as systemic failures have been addressed. As I already said in a previous answer and I said in my report, I believe that the implementation of the recommendations should be closely monitored and should be audited to ensure that things have changed. However, I am not in a position to know that.
Dorothy Cory-Wright: May I add one point on that? I want to point out that Dame Elizabeth’s work concluded in the time period January 2019 and we were also told subsequently by the FCA, which we have not verified independently, that work had been going on during the period prior to our recommendations being made. It may be that that has been the subject of internal audit, but we just do not know about that.
Gareth Thomas
Q
Dame Elizabeth Gloster: We certainly had a meeting, as I said a moment ago, with the new CEO. As I said in my report, the FCA’s response should involve an assurance exercise to confirm that any steps taken have achieved the desired objective. Indeed, it is important and was a significant feature of my report that there should be some sort of audit process that would be made publicly available.
Gareth Thomas
Q
Andy Agathangelou: I do not think we need to talk hypothetically about whether there is a chance that a case like LCF could happen again. We believe cases—plural—like LCF are happening right now and we have evidence to support that claim. I will pass over to Mark for any further comments that he would like to make, but I will commit to providing all the Committee members with evidence relating to a range of issues that I believe will lead to the conclusion that this is a very serious problem that has not yet gone away. It is happening now.
Mark Bishop: I agree with that. I would just like to give you a few examples of what I mean. I would like to pick up on something that Dame Elizabeth said, because I strongly agree with it, which is that the single biggest problem that the FCA has is cultural. The problem with cultural change is, first, it takes a while to fix, even if you are trying to fix it. Secondly, the closer you are to it, the harder it is to spot the problems, let alone know how to fix them.
One of the first things that Nikhil Rathi did in response to the two independent reviews published in December was to announce the appointment of an executive director for transformation. This is a new role that has never existed before. He did not advertise the job externally. He gave it to Megan Butler, and Megan Butler is a name that is mentioned in Dame Elizabeth’s report as one of the people who held a position of responsibility in relation to LCF. She does not apportion blame specifically, but she does apportion responsibility. I believe that had Raj Parker not succumbed to FCA lobbying to also redact the names of executives, her name would have appeared in that document as well. She may be a highly intelligent individual and acting in good faith, but she was literally a founder employee of the Financial Services Authority in 2000, and I would question whether a fresh pair of eyes and a fresh mind might be better suited to the job of transforming the organisation.
To use the hypothetical example of whether something similar might happen again, Dame Elizabeth helpfully pointed out in her report that, prior to the summer of 2016, LCF did not have authorised status from the FCA, and therefore it had to get its promotions approved by a third party that was on the register. This was a firm called Sentient Capital London Ltd. The first complaint or notification into the FCA that there were concerns about whether those promotions were accurate happened in January 2016, five and a half years ago. I looked on the FCA register just last Friday when I knew I was coming to this session to see whether there was any investigation under way against that firm or its directors, or whether it had a limitation attached to its registration that meant that it could not approve promotions for third parties, and I found that none of those things has happened.
So not only could another LCF happen, but it could happen using one of the same firms today, five and a half years on, and that seems to me an example of the complacency of the FCA that is, in the view of most campaigners, culturally where the problem is. Also, Gareth Thomas talked very early on in this evidence session about the voice of the consumer and to what degree are consumers’ voices being heard in the FCA. I think a genuine transformation of the FCA would have consumer voices, including campaigners, very much at the heart of it, and I do not think that that is happening.
Gareth Thomas
Q
Dame Elizabeth Gloster: Between the FCA and bondholders and LCF? You mean after the company became insolvent or—
Gareth Thomas
And before, because there was a pattern of customers trying to get in touch with the FCA to complain about LCF’s products. I am interested to know whether there was ever any attempt to meet that group of customers by relatively senior people within the FCA.
Dame Elizabeth Gloster: Let me answer that in this way. First, it is clear, as my report sets out, that a lot of complaints were made or questions raised by consumers and bondholders, or prospective bondholders, and they were not dealt with adequately. There is a full chapter dealing with that. One of the criticisms that I made was that the communication or the recording of complaints was not adequate. I will ask John Bedford to come in here, but I do not think that there was, before the company went into administration—or was shut down, effectively, by the FCA—any meeting with groups of bondholders. John, can you help me on that?
John Bedford: Of course, Dame Elizabeth. As far as we are aware in relation to the intervention in 2019, there were no meetings between bondholders, or groups of bondholders, and the FCA.
Gareth Thomas
Sure. The biggest issue for the FCA in terms of particular cases at the moment and consumers is, as I understand it, the potential demutualisation of Liverpool Victoria. I wonder whether any of the witnesses find it extraordinary that no policy paper has been published by the FCA on the handling of demutualisations.
The Chair
Mr Thomas, I am afraid your current question is not within the scope of the Bill, so unless you have another question to ask, I will move to another Member.
The Chair
Okay, that brings us to the end of this session. If there are no further questions from Members, I thank the witnesses for their evidence. Because we have closed a little sooner than expected, I will invite the Government Whip to propose the Adjournment. Please will Committee members leave the room promptly by the door marked “Exit”, while observing social distancing? The Committee will meet again today at 2 pm in Committee Room 10 to begin line-by-line consideration of the Bill.
Ordered, That further consideration be now adjourned. —(Alan Mak.)
Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (Second sitting)
Tuesday 15th June 2021
(3 years, 6 months ago)
Public Bill CommitteesRead Full debate Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 15 June 2021 - (15 Jun 2021)
The Committee consisted of the following Members:
Chairs: † Ms Nusrat Ghani, Peter Dowd
† Bell, Aaron (Newcastle-under-Lyme) (Con)
† Benton, Scott (Blackpool South) (Con)
† Cates, Miriam (Penistone and Stocksbridge) (Con)
† Davies, Gareth (Grantham and Stamford) (Con)
† Fuller, Richard (North East Bedfordshire) (Con)
† Glen, John (Economic Secretary to the Treasury)
† Grant, Peter (Glenrothes) (SNP)
† Hunt, Jane (Loughborough) (Con)
† McFadden, Mr Pat (Wolverhampton South East) (Lab)
† Mak, Alan (Lord Commissioner of Her Majesty's Treasury)
† Opperman, Guy (Parliamentary Under-Secretary of State for Work and Pensions)
† Owen, Sarah (Luton North) (Lab)
† Rodda, Matt (Reading East) (Lab)
† Thomas, Gareth (Harrow West) (Lab/Co-op)
† Twist, Liz (Blaydon) (Lab)
† Williams, Craig (Montgomeryshire) (Con)
Seb Newman, Committee Clerk
† attended the Committee
Public Bill Committee
Tuesday 15 June 2021
(Afternoon)
[Ms Nusrat Ghani in the Chair]
Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill
The Chair
We are now sitting in public and the proceedings are being broadcast. Before we begin, I have a few preliminary announcements. Members will understand the need to respect social distancing guidance. In line with the Commission’s decision, face coverings should be worn in Committee unless Members are speaking or are medically exempt. Hansard colleagues would be grateful if Members could email their speaking notes to hansardnotes@parliament.uk. Please switch electronic devices to silent. Tea and coffee are not allowed during the sittings.
We now begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room and shows how the selected amendments have been grouped together for debate. Amendments grouped together are generally on the same or a similar issue. Please note that decisions on amendments do not take place in the order that they are debated but in the order that they appear on the amendment paper. The selection and grouping list shows the order of debates. Decisions on each amendment are taken when we come to the clause to which the amendment relates. A Member who has put their name to the leading amendment in a group is called first. Other Members are then free to catch my eye in order to speak to all or any of the amendments within that group. A Member may speak more than once in a single debate. At the end of a debate on a group of amendments, I shall call the Member who moved the leading amendment again. Before they sit down, they will need to indicate whether they wish to withdraw the amendment or seek a decision. If any Member wishes to press to a vote any other amendment in a group, they need to let me know.
Clause 1
Compensation payments to customers of London Capital & Finance plc
Mr Pat McFadden (Wolverhampton South East) (Lab)
I beg to move amendment 1, in clause 1, page 1, line 5, at end insert—
“(1A) Within six months of this Act receiving Royal Assent, the Secretary of State shall lay before Parliament a report that considers the circumstances and impact of the payment of compensation to the customers of London Capital & Finance plc and that, in the light of that consideration, sets out the following—
(a) the circumstances in which taxpayer-funded compensation should be paid following the collapse of investment companies in future;
(b) the extent of regulatory failure necessary to trigger compensation funded by the taxpayer in future; and
(c) the limits to taxpayer exposure to investment failings.”
This amendment would require the Secretary of State to lay before Parliament a report exploring the impact of the payment of compensation to the customers of London Capital & Finance plc and giving criteria for when the taxpayer should compensate investors for investment failures.
The Chair
With this it will be convenient to discuss amendment 7, in clause 1, page 1, line 18, at end insert—
“(5) Within six months of this Act coming into force, the Secretary of State must lay before Parliament a report that assesses the impact of the payment of compensation to the customers of London Capital & Finance plc under this section, and in the light of that assessment, sets out the following—
(a) an assessment of the regulatory failures that gave rise to the need to compensate the customers of London Capital & Finance plc;
(b) measures the Government is taking to prevent such regulatory failures in the future;
(c) the reasons why the Government is providing compensation to the customers of London Capital & Finance plc but not the customers of other failed investment firms;
(d) criteria for when the Government should be expected to provide compensation following the collapse of investment firms; and
(e) the reasons for the capping of compensation payments under this section at 80% of what customers of London Capital & Finance would have been entitled to under the Financial Services Compensation Scheme.”
This amendment would require the Secretary of State to lay a report before Parliament that assesses the impact of the Government compensating the customers of London Capital & Finance plc, as well as broader issues relevant to the mis-selling scandal.
Mr McFadden
Thank you for your guidance, Ms Ghani. Later, I will move amendment 2 and, with your help, my hon. Friend the Member for Reading East will move amendments 3, 5 and 6, which stand in the Opposition’s name.
Amendment 1 relates to the first clause of the Bill, which deals with the compensation scheme relating to the collapse of London Capital & Finance and which is based on the report published by Dame Elizabeth Gloster, on which we took oral evidence this morning.
Clause 1 enables a very significant Government decision to step in and compensate people for the collapse of an investment firm. The estimated cost given by the Treasury for that decision is about £120 million. As the Minister pointed out on Second Reading, it is rare that the Government do that. He told us that there have been only two other cases in recent decades—Barlow Clowes and Equitable Life—and even those decisions did not always bring matters to a close. With Equitable Life, some investors around the country remain dissatisfied with the levels of compensation that have been paid out. There is an all-party parliamentary group in this House, and we have my indefatigable hon. Friend the Member for Harrow West, who has led at least one debate, if not more, on these issues, on the Committee. Such decisions do not always bring the matter to a close.
The focus of the amendment is to try to bring some clarity to Parliament and the public about when the taxpayer should be on the hook for an investment collapse, and when not. This issue was raised in oral evidence this morning by the hon. Member for North East Bedfordshire. He used the well-known phrase “caveat emptor”, or “buyer beware”, which applies those who may buy investment products. The trouble at the heart of this case is that the investors did not think they were making a particularly risky decision. LCF sold mini-bonds on the basis of a guaranteed investment return. When those who suspected something might be wrong phoned the FCA, time after time they were reassured that nothing was wrong. To quote one of the FCA’s call handlers, “This is not a scam”. While the hon. Gentleman was right to raise the principle of caveat emptor, how can we blame the investors if the very regulator looking after the thing was reassuring them that there was nothing to be concerned about?
The Government have judged the level of regulatory failure to be so exceptional and egregious that they have decided that the taxpayer has a responsibility to compensate, or as it is sometimes put, to socialise the losses. The level of compensation set by the Government is 80% of the maximum level allowed by the Financial Services Compensation Fund. That maximum is £85,000, so 80% leaves investors with a maximum pay-out of about £68,000.
There is debate about that 80%. Members of the Committee will have been sent written evidence from various LCF investors who think that level is too low. They do not understand why they have been asked to forfeit 20% of their investment because of what the Government acknowledge to be a particularly egregious regulatory failure. The Government will have to debate that. Their justification for any compensation at all is that LCF is a unique case. Both Ministers spelled that out on Second Reading last week. In his opening speech, the Pensions Minister said:
“While other mini-bond firms have failed, LCF is the only mini-bond firm that was authorised by the FCA and sold bonds in order to on-lend to other companies.”
He went on to say:
“It is…important to emphasise that the circumstances surrounding LCF are unique and exceptional, and the Government cannot and should not be expected to stand behind every failed investment firm.”—[Official Report, 8 June 2021; Vol. 696, c. 905.]
We agree, and that is precisely what the amendment is about: to try to get some clarity on the Government’s thinking when the degree of regulatory failure is so exceptional that it warrants the taxpayer picking up the bill. When that is not the case, whatever losses there may be should be regarded as normal investment market failings.
Gareth Thomas (Harrow West) (Lab/Co-op)
My right hon. Friend rightly sets out the scale of regulatory failure. Does he think that one of the other potentially unique circumstances of this case is the apparent legislative lacuna about who had the responsibility for regulating mini-bonds? Dame Elizabeth Gloster set out that, on the one hand, the FCA said it should be Her Majesty’s Revenue and Customs; HMRC was equally clear that it thought it should be the FCA. We do not know whether that legislative lacuna has yet been sorted. Does my right hon. Friend think that was also a factor in the Government’s decision to compensate to the scale they have?
Mr McFadden
My hon. Friend is right; the lacuna referred to in the report relates particularly to the allocation of ISA status. We asked Dame Elizabeth about that during the oral evidence session this morning. This is important because if there are two things that gave the mini-bonds the stamp of respectability, it would be that prominent in LCF’s advertising was the statement that it was regulated by the FCA, which at firm level was true but was not true of the mini-bonds being sold, and that they could be placed inside an ISA wrapper. Although it is, of course, true that people who invest in ISAs can lose money, for understandable reasons, the ISA wrapper has a certain cachet and a note of respectability.
Dame Elizabeth confirmed during oral evidence this morning that once the ISA wrapper status was allocated in 2017, the degree of investment in those mini-bonds rose markedly, because people would have thought they were investing in something safe. The adverts spoke, in fact, of a 100% record in paying out, when what we were really dealing with was a pyramid scheme where any pay-outs that did come came from other investors and not normal market returns. People thought they were investing in a safe bond. They did not think they were playing investment roulette.
The Economic Secretary also emphasised the uniqueness of the LCF case in his closing speech on Second Reading. He said:
“LCF is unique in that regard; indeed, it is the only mini-bond issuer that was authorised by the FCA and that sold bonds to on-lend to other companies.”—[Official Report, 8 June 2021; Vol. 696, c. 918.]
That is an exact replica, with both Ministers saying the same thing, and I suspect that that phrase has been very carefully honed inside the Treasury. A case had to be made for the uniqueness of this that could not be applied to other investment failures, so I think that form of words is very carefully chosen. However, the Minister may be able to tell us more when he responds.
The amendment is designed to tease out the following point, which I want to clarify with the Minister. Is it the case that even though a number of mini-bond issuers have collapsed in recent years, LCF is the only one that was authorised and regulated by the FCA? The Minister can intervene now or I am happy to wait. As I said to the Ministers on Second Reading, there must have been a discussion in the Treasury about developing a compensation scheme such as the one set out in clause 1. The question would have been asked: if we did this for LCF, what about investors in the Connaught fund or Blackmore Bond or any of the other investment schemes that were raised either on Second Reading or during the oral evidence session this morning? What was the nature of those discussions at the Treasury and what is it about LCF that makes the Government convinced that compensation is due in this case but not in the others? That is why our amendment calls for a report. Having taken the decision to compensate, we believe it would be in the public interest for the Treasury to set out the circumstances under which the taxpayer might be expected to pay when investors lose money. Is it about a firm being authorised by the FCA? Is it about commissioning a report by an eminent and independent figure such as Dame Elizabeth Gloster?
The Economic Secretary to the Treasury (John Glen)
I am very happy to respond at length in my remarks at the end. The distinction we make is that LCF is the only FCA-authorised firm that was on-lending. That is the distinction; not so much the mini-bond issuance but the on-lending nature of it.
Mr McFadden
I am grateful to the Minister. I am just going through this series of things to try to clarify exactly what might place the taxpayer on the hook. Does it require the kind of report carried out by Dame Elizabeth Gloster and commissioned by the FCA into the collapse of LCF? Is there a clear threshold of regulatory failure to be passed? There was obviously regulatory failure in this case, but, as we saw from the witnesses this morning, people will argue that other regulatory failures have applied to other firms.
In this case, the regulatory failures were multiple. I do not want to go through them in detail because we will come on to other amendments in which they can be discussed, but I will mention a few of them briefly: misleading promotions by LCF using the halo effect have been regulated by the FCA yet not adequately dealt with by the financial promotions team at the FCA; a failure by the same financial promotions team to join the dots and alert other parts of the FCA, such as the supervisory team, on the implications of those misleading promotions; and multiple attempts to alert the FCA—more than 600 phone calls, according to annex 6 of Dame Elizabeth’s report. Yet, in the vast majority of cases nothing was passed up the line of pursuit, in large part because the mini-bonds were not regulated by the FCA, so the call-handlers’ instincts were, “You’re phoning us about something that we do not regulate, so we don’t have to pass it up the line”—even though the firm as a whole was regulated by the FCA.
That brings us to the failure to take what Dame Elizabeth calls a “holistic approach” to viewing LCF from within the FCA. One could pose the question of what “regulated by the FCA” means if the regulator then ignores the vast majority of what the company does because it does not fall within the regulatory parameter. In the Treasury’s eyes, those regulatory failures, together with the others set out in the report, were enough to trigger the Bill, in both senses of the word. So, what is the principle at stake? When is regulatory failure so obvious and complete that the taxpayer should compensate investors for their losses? That is what the amendment seeks to clarify. We believe that such clarity would be of great benefit to the FCA in the conduct of its duties and in its task of learning the lessons from Dame Elizabeth’s report. It would also be in the public interest. Indeed, without such clarity, the question will continue to be asked: “Why compensate in this case and not others”?
The final point covered by the amendment is the question of any limitations on taxpayer exposure.
Gareth Thomas
My right hon. Friend is understandably concerned to protect the taxpayer’s interest. Is there not also another dimension as to why the report he seeks is worthwhile? If there is regulatory failure by the FCA in other ways, and not just in the handling of investors’ resources, and if there is no chance of the Government stepping in and offering compensation for that failure, then, for example, if a big financial services company that was not properly regulated by the FCA were to be demutualised, would there not be a reason to offer compensation? Or, if not, would that let the FCA off the hook?
Mr McFadden
My hon. Friend raises a very important point. There are many reasons why clarity about the limitations of Government responsibility and taxpayer responsibility, to put it another way, would be extremely helpful. The very fact of producing the Bill will mean that the Government have asked those questions anyway. As I said earlier, the cost in this case is expected to be about £120 million. The costs of clause 2, which we will come to later, are expected to be over £300 million. Over both clauses the cost will therefore be more than £400 million. That is a large sum of public money that will, in the case of clause 2, be recouped over a period of years from pension scheme members.
Of course, it is possible to have investment failings on an even greater scale. Is there any upper limit that the Treasury would see to such taxpayer exposure, or is it always to be on a case-by-case basis? In theory, investment failings could cost billions rather than hundreds of millions. Our amendment seeks to clarify the Government’s thinking on that, which would be beneficial to Parliament and the public.
Those are the reasons why we have tabled this amendment. We think that the compensation scheme and the whole story of the collapse of LCF demands such clarity and that reports such as the one we have called for would be beneficial.
Peter Grant (Glenrothes) (SNP)
It is a pleasure to serve under your chairship, Ms Ghani.
I shall speak to amendment 7, in my name, and in support of the official Opposition’s amendment 1.
Both amendments call for the Secretary of State to report back to Parliament on issues that collectively raise many still unanswered questions about the Bill, about the compensation scheme, and about why the scandal of London Capital & Finance was allowed to happen.
By far the biggest criticism of the Bill, which we again heard from witnesses today, is that it has been deliberately framed so narrowly that those questions are in danger of being ignored. I know that the Government will argue that framing it narrowly increases its chances of getting on to the statute book—I accept that argument—but there is a downside to doing that.
The biggest question that is still unanswered is: why do we expect compensation for the victims of one investment mis-selling scandal when so many people have lost so much—possibly a total of more than £1 billion —in other company collapses that share most, and sometimes all, of the key features of London Capital & Finance?
I should make it clear that I am not asking for the setting up of other schemes. We are not asking for approval at this stage, or for other failures to be included in the LCF scheme. All we are asking for is some clear indication that the Government are taking action to look at the wider issues.
The Government’s answer is that London Capital & Finance was regulated by the Financial Conduct Authority and that companies such as Blackmore Bond were not. That smacks of looking for an explanation to justify a decision that has been taken for a completely different reason.
Companies such as Blackmore Bond set out to make prospective investors believe that the FCA had a role in protecting their money. Investors in LCF were misled into believing that its own registration with the FCA would cover their investments. The only difference with other company failures is that investors in those companies were misled into believing that someone else’s registration would cover them—a fine point lost on investors themselves.
The Government’s explanation appear to assume that the only problem, or even the biggest problem, with London Capital & Finance was that it was a regulated company selling unregulated investments. That was certainly part of the problem, but, as the written submissions from a number of investors and as evidence this morning made clear, there were other failings and possibly deliberate malpractice within the company and some of its advisers. Other failings of regulation went well beyond those laid at the feet of the Financial Conduct Authority in relation purely to LCF. If the Government constantly remind us that the sale of mini-bonds was not regulated by the Financial Conduct Authority, surely the elephant in the room is: why on earth not?
The Government will, I know, refer to the principle of caveat emptor. It is correct that anyone making an investment has a responsibility to ensure that the investment meets their needs, but there are hundreds—possibly thousands—of examples in UK regulation where we regulate the market but it is not realistic or fair to expect the emptor to caveat.
We do not expect people to do their own personal survey of a house to make sure it is safe before they buy it. We do not expect people to check the brakes on the bus before buying a ticket. We have regulation to protect public safety, on food standards, on product safety and on a number of financial transactions. It is perfectly possible for the Government to start to look at regulating these investments in future and compensating ordinary men, women and sometimes children who have lost sums that, individually, are not significant to the FCA but are massively significant to their plans for retirement, for paying to support their children at university or for ever.
We must make it clear that we are not asking the Government to approve compensation for every company failure. We are not asking them even to consider the implications of doing that. We are asking them to look specifically at cases where there is clear evidence of the mis-selling of investments, usually to people who the seller knew perfectly well were not suited to that investment. That has been a characteristic of all the cases we have looked at today.
Gareth Thomas
I am particularly drawn to proposed subsection 5(b) of amendment 7. I wonder whether the hon. Gentleman shares my view that one measure the Government need to require of the FCA in the future, to prevent further such regulatory failures, is for it to take a more hands-on approach when customers get in contact to raise concerns about particular businesses; and to make it a point of principle that, when a significant number of customers raise concerns about the activities of a firm, the FCA might actually try to meet some of those customers, rather than, as appears to be the case at the moment, only bothering to meet representatives of the board and management of said firm.
Peter Grant
The hon. Gentleman makes a valid point. A lot of the issues he raises are covered in Dame Elizabeth Gloster’s report and recommendations. She even pointed out today that possibly the single biggest failing—certainly one of the biggest failings—was that the Financial Conduct Authority had too restrictive a view of its purpose in regulating the market.
I have to say that it is not only the Financial Conduct Authority that has failed to regulate. What was the registrar of companies at Companies House doing when they got a copy of the audited accounts of Blackmore Bond—the only copy that was ever submitted by that entire group—in which it said, in so many words, that in order to pay the guaranteed interest on money it had already received from investors, it had to keep on getting more and more new investors? It was effectively a Ponzi scheme in all but name. The auditors made similar comments on the accounts but did not seem to be under any obligation or duty to do anything else. Nobody at Companies House, or the registrar of companies, appears to have been under any responsibility to look at the documents submitted to spot the danger signs; nobody anywhere seems to have been responsible for that. Although the Financial Conduct Authority has been rightly and severely criticised for its failure to regulate London Capital & Finance, we are talking about a much wider failure of the regulatory regime. Maybe one of the biggest difficulties is that there are so many people who might be involved and they are quite happy to point fingers at one another, saying that they should be responsible.
I realise I am in danger of wandering off the narrow scope of the Bill. We cannot amend the Bill to set up a more comprehensive compensation scheme just now because of the way it is framed; we cannot even amend it to set up a framework so that the Secretary of State, through statutory instrument, could extend it in the future. However, we can ask the Secretary of State to explain to Parliament not only what the Government are doing to help the victims of this one scandal but what lessons they have learned and what they are doing to make sure these scandals cannot be repeated. I hope the words of the witnesses from the Transparency Task Force this morning are ringing in all our ears. They believe they have evidence that there are other scandals like LCF happening right now and that it is just a matter of time before they collapse and leave yet more investors out of pocket.
Finally, why is it that the Government need to be called to account and asked to explain to Parliament why it is that, while they are supporting the victims of LCF, they are doing nothing to help the thousands of other victims of other scandals that have already come home to roost? For those victims, improvement in regulation alone is far too late.
Gareth Thomas
I do not intend to detain the Committee long, because my right hon. Friend the Member for Wolverhampton South East made an excellent speech on this issue; I merely want to underline the point that I made in when intervening on him. There seems to be a degree of risk in the Government’s approach. Again, it would be good to hear from the Minister to better understand why the level of regulatory failure in this particular case should merit Government compensation, whereas if there were to be regulatory failure in, say, the case of the FCA’s handling of the demutualisation of Liverpool Victoria, that would not merit compensation for the 1 million-plus customers and owners of that financial services business.
I also underline the point that I made when intervening on the hon. Member for Glenrothes, who speaks for the Scottish National party, on the need of the FCA to perhaps rethink its approach to consumers more generally. At least one of the regulators in the financial services business case that I have particularly been following—that of Liverpool Victoria—has met representatives of that organisation some 35-plus times but has not met consumers at all. That seems to be an example of the FCA continuing not to have properly thought through where it might need to change its practices going forward. I know the Minister will be looking at this issue, and I gently encourage him to focus particularly on that aspect of the regulatory failure.
My right hon. Friend the Member for Wolverhampton South East underlined the point in Dame Elizabeth Gloster’s report that there have been 600 phone calls from customers about LCF’s poor performance, yet that still did not seem to spur on the FCA to take action quickly. There are almost 10 times as many consumers who are members of Liverpool Victoria as those who invested in LCF, which surely further underlines the need to get right how the FCA handles the consumer interests going forward. I look forward to the Minister’s answers.
John Glen
It is a pleasure to serve under your chairmanship, Ms Ghani, and I thank all Committee members for their consideration of this important legislation.
As I set out on Second Reading, the Bill is a vital step in compensating LCF bondholders, and I will now turn directly to the consideration of amendments 1 and 7. As the right hon. Member for Wolverhampton South East set out, amendment 1 seeks to add a requirement for the Secretary of State to lay before Parliament a set of criteria for when the taxpayer should compensate investors for investment failures. In essence, it brings some clarity about when the mechanism that we are adopting, and hopefully funding, through the passage of the Bill would be used. Amendment 7 seeks to require the Secretary of State to lay before Parliament a report that assesses the impact of the Government’s compensating the customers of London Capital & Finance plc, as well as broader issues relevant to the mis-selling scandal.
I have listened very carefully to the speeches made during the passage of the Bill, on Second Reading and today, and to the evidence that we received this morning. I am particularly drawn to the remarks of my hon. Friend the Member for North East Bedfordshire, who acknowledged that a degree of risk is involved with any investment. With the right set of regulations and requirements, however, investors can be equipped with the right information to understand their risks and to make informed choices. The Government’s scheme appropriately balances the interests of both bondholders and the taxpayer, and it will ensure that all LCF bondholders receive a fair level of compensation for the financial loss they have suffered.
I turn now to compensation. I must reiterate that LCF’s failure was unique and exceptional. It is the only failed mini-bond issuer that was FCA-authorised and was selling bonds in order to on-lend to other companies. In conjunction with the FCA, the Treasury has looked at eight mini-bond firms that have failed in recent years, and LCF is unique in that respect. It is important to emphasise that the Government cannot and should not stand behind every investment loss. As I have probably said previously, LCF’s business model was highly unusual in both its scale and structure, and the extraordinary circumstances surrounding its collapse are unique.
Peter Grant
Has the Economic Secretary or any of his advisers actually read the promotional material that companies such as Blackmore Bond were giving out, to assess the number of times that words such as “guarantee” and “secure” were included in those documents? Does he not accept that something needs to be looked at there—maybe not for compensation this time, but certainly for tighter regulation in the future?
John Glen
I am grateful to the hon. Gentleman for his intervention because it takes me to the question of what the Government are doing to improve the efficacy of the financial promotions regime that he mentioned in respect of a different failure. We continue to keep the legislative framework underpinning the regulation of financial promotions under review, including whether it is suitable for the digital age. Many of the promotions are obviously online. We will publish a response in the early summer to the consultation on a regulatory gateway for authorised firms approving the promotion of unauthorised firms. It is not an issue that we take lightly. Change, once in place, is designed to strengthen the regime by ensuring that firms able to approve financial promotions are limited to those with the relevant expertise to do so. The FCA will be better able to identify when a financial promotion has breached the restrictions and take action accordingly, but that does not mean that the LCF failure is not unique and of a different scale and quality from some of the other failures.
Mr McFadden
I want to ask the Minister about the point he made about on-lending. What is the relationship between on-lending and the degree of regulatory failure? He is probably right that this was the only firm doing on-lending, but Dame Elizabeth’s report focuses on an egregious regulatory failure and she sets out all the different things that we will discuss. I suspect that the Government have found something about this case that is unique in order to insulate themselves from claims from other investment failures. I do not see the relationship between that uniqueness and the regulatory failures outlined in Dame Elizabeth’s report.
John Glen
As the right hon. Gentleman set out, Dame Elizabeth’s report showed enormous failure in the way that the FCA discharged its responsibility for a regulated firm carrying out unauthorised activities. The point that he is making specifically is about the distinctiveness of the on-lending. There is a distinction between a firm, such as BrewDog or Hotel Chocolat, that raises funds for its own business activities and a firm that, although authorised, has not carried out regulated activities. Through the failure of the FCA’s oversight to look at the broader activities of the firm, it is impossible to verify whether those activities on lending bore any relationship to the raising of funds for that business. That is the distinctive difference. It is that failure of the FCA to execute its broader responsibility for an authorised firm carrying out an unauthorised activity in this distinct area that gives us licence to intervene.
On the specific issue of non-transferable debt securities, which are commonly known as mini-bonds, the Government are consulting on proposals to bring their issuance into FCA regulation. After listening to the evidence this morning, I would just make the point that Dame Elizabeth Gloster made 13 recommendations in her report. In the written ministerial statement of 17 December 2020 that was issued in my name all those recommendations were accepted—nine pertaining to the FCA and four to the Treasury. There has also been a subsequent undertaking by the FCA to report on progress against those actions and recommendations. The FCA is conducting a detailed piece of work to look at the issue of high-risk investments holistically, and that includes a discussion paper to get views on changes that can strengthen the FCA’s financial promotion rules for high-risk investments. This work follows the FCA’s ban on the mass marketing of speculative illiquid securities.
As the right hon. Gentleman rightly said, only three Government compensation schemes have been established in the past three decades: Barlow Clowes, Equitable Life and LCF. I acknowledge that, for some, they have not been complete and satisfactory. Despite many investment firms failing over that period, the fact that there have only been those three interventions on the scale that we are seeking to secure today demonstrates that this type of intervention is the exception and not the rule. Moreover, the particular circumstances of these three cases are quite different. For example, compensation was provided to Equitable Life investors, in most cases not because they had lost their original capital but because the firm had not met the expected returns on which many investors had based their future retirement plans. That contrasts starkly with LCF, where investors stood to lose their principal sum.
The common feature in each case is a degree of maladministration or misregulation—a major factor that the Government considered in deciding to launch the LCF compensation scheme—but the circumstances are idiosyncratic. It therefore would not be possible in any meaningful sense to set out the precise framework for Government to consider when establishing such schemes in future or to stipulate the threshold of misregulation ex ante.
That does not mean to say that as a Minister, and in my frequent engagement with the FCA, I do not look closely at all these matters. Indeed, I have done so throughout the process in getting to this point today. I believe that such a framework could create an unrealistic expectation among investors about the possibility of future Government compensation schemes and the misconception that Government will stand behind bad investments. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments, thinking that the Government will provide compensation if things go wrong.
I want to address some of the points that the right hon. Gentleman made. He mentioned ISAs. As we announced in response to Dame Elizabeth’s report, HMRC and the FCA have now established an ISA intelligence working group to strengthen communication and information sharing between the two organisations. The group has met and agreed the structure and objectives, which is already resulting in information sharing between the two organisations.
In parallel, from this autumn, once recruitment of personnel is complete, HMRC will reinforce its ISA compliance regime with a programme of ISA manager audits. This will not focus on consumer protection, which does not fall within HMRC’s remit, but could detect technical breaches of the ISA regulations.
We are exploring steps to increase consumer understanding of the ISA wrapper. As the right hon. Gentleman rightly said, this has a large degree of consumer confidence vested in it. We need to tackle the misplaced perception that ISAs benefit from greater Government or regulatory assistance.
I have deep engagement with the FCA. I will speak later this week to the chief executive as part of my routine, regular engagement and I will relay the detailed comments of, in particular, the hon. Member for Harrow West on the degree of engagement of consumer groups versus the regulated firm’s representatives, and especially the case he is on at the moment.
We heard evidence this morning about the retention of one named individual. The chief executive has brought in five new people from outside the organisation in taking a balanced view on how to deliver a successful transformation programme. I urge him to continue successfully to implement the programme.
There are considerable principled and practical drawbacks to the amendment, which is why I ask that it be withdrawn.
Mr McFadden
I am grateful for the Minister’s response.
I am not entirely convinced about the relationship between on-lending and the decision to compensate. I am sure that the Minister is correct in the literal sense that this was the only regulated firm that was selling unregulated mini-bonds. I am not saying that the Minister is wrong, but from reading the report I believe that Dame Elizabeth would have made the same findings. The mini-bonds were not doing what it said on the tin: they were not on-lending but pyramid selling.
The degree of failure, the degree of investment loss and the degree of regulatory failure are not directly related to the point about on-lending: it is more substantial than that. I am not convinced that all the elements of the Government’s case add up. It looks to me as though they have had to find a unique element to insulate themselves from court action or other claims.
Peter Grant
As an indication of the Government having come to a decision and then looking for an explanation for it, I do not know whether the right hon. Gentleman picked up in the Minister’s comments how for the first time, in my knowledge, the concept of the scale of the failure—if I wrote down what the Minister said exactly right at the time—was that London Capital & Finance was unique and of a scale and nature that made it different from the rest. Does the right hon. Gentleman believe that the fact that the scale of the failure has now been quoted as a factor, when it was not before, is an indication that the Government have come to a decision and are now looking for reasons to justify it?
Mr McFadden
We are trying to put ourselves into discussions that we have not been party to so, to some extent, I am speculating on the way that the Government have built their argument.
I have made the point and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr McFadden
I beg to move amendment 2, in clause 1, page 1, line 15, at end insert—
“(3A) Within six months of this Act receiving Royal Assent, the Secretary of State shall lay before Parliament a report setting out progress on the implementation of the recommendations in pages 47 to 49 of the Gloster Report.”
This amendment would require the Secretary of State to lay before Parliament a report setting out progress on the implementations of the thirteen recommendations in the Gloster Report.
Amendment 2 concerns the recommendations made in Dame Elizabeth’s report. It is a long report, but I am specifically referring to the series of conclusions and recommendations made on pages 47 to 49. As the Minister said a few moments ago, some of those recommendations are for the FCA and others are for the Government. We heard Dame Elizabeth say this morning that if she reached one overall conclusion that she wanted us to understand, it would be about the degree of culture change necessary for the FCA to fulfil its statutory duties. The fact that she judged that the culture that existed was so inappropriate that it stopped the FCA from doing its statutory job effectively is a serious charge. It is, after all, the body that we depend on to uphold the consumer interest and charged with ensuring proper conduct in the sale and provision of financial services. I do not need to tell anybody on the Committee how important those are, either to everyday life or to the UK economy.
One of the most telling parts of Dame Elizabeth’s report is when she discusses the loss of a letter sent to the FCA by a financial adviser called Neil Liversidge in November 2015, fully three years before the collapse of LCF. The letter warned in fairly graphic language, some of which I read out on Second Reading, what was going on at LCF and the financial adviser’s concern. Dame Elizabeth’s damning conclusion is that even if the letter had not been lost in the FCA, which appears to be what happened, so dysfunctional was the FCA that it would not have done anything about it anyway. She says on page 78 of the report:
“it is unlikely that it would have resulted in any”
action by the FCA. She found that degree of dysfunctionality to be deep and in need of urgent attention, as set out in the recommendations.
Every time there is a public failing, we hear some familiar things being said. In fact, we could almost play word bingo with them. People talk about lessons learned and new systems being put in place, and sometimes there is change of leadership or a change of the management team—all those things. In the report, there was a very well publicised disagreement about the nature of accountability and responsibility involving Dame Elizabeth and the now Governor of the Bank of England, who led the FCA at the time. That was all played out in front of the Treasury Committee over several hearings early this year. I want to focus on the 13 specific recommendations on pages 47 to 49. I am not going to go through them in huge detail, but I will mention a few.
The first recommendation is the desire to treat the regulation of companies holistically; that is, to deal with the halo effect of regulated companies selling unregulated products. That was at the very heart of the regulatory failures over LCF. It was a big part of why the many phone calls to the FCA alerting staff to investor fears about what was going on went unheeded. Indeed, Dame Elizabeth’s report records many instances where calls were not acted on because the mini-bonds concerned were not regulated. There is a whole annex containing the transcripts and I will not delay the Committee with them at the moment, but they are all set out in the report.
The failure to act exposed a major weakness in the FCA’s approach. Even if staff could tick a box that said that a phone call was about something that it did not regulate, the FCA was still on the hook at the end of the day if the firm failed, as the Bill now shows. The recommendation therefore requires a major change in how the FCA thinks about unregulated products.
The next two recommendations are about how the FCA deals with information passed on to it and how it is shared. Again, they highlight a failing in how the LCF information was handled. As we have said, the financial promotions team intervened several times to warn the company about the misleading nature of its promotions as it kept saying that it was regulated by the FCA. However, the financial promotions team did not escalate this information to other parts of the organisation that could have taken action.
The fifth recommendation deals with the financial promotion rules and what to do about breaches when red flags should be raised. Page 49 highlights recommendations more for the Treasury than the FCA. As we discussed a moment ago, the first of those deals with what Dame Elizabeth calls a lacuna in the allocation of the ISA-related responsibilities between the FCA and HMRC. The Minister referred to a working group—I think that is the phrase that he used—and I hope it reaches a conclusion quickly. Such a response is common in the catastrophe word bingo that we often hear. A working group is okay, but it has to deal with the lacuna that has been identified.
Just saying that something is regulated by the FCA gives it an aura of safety and respectability and so does saying that about investments in an ISA wrapper. As the report says, once ISA status was granted to these mini-bonds, investment in them grew markedly. Putting money into an ISA is thought to be a responsible thing to do. People believe that those operating ISAs are respectable companies and not those engaged in what are, in effect, pyramid selling schemes like the one that LCF was operating. That is why this issue is particularly important.
Recommendation 12 is about the optimal remit of the FCA. That matters because the failure of LCF sits so squarely on the boundary of regulated companies selling unregulated products. The FCA’s remit is known in the parlance as the perimeter. The Minister gave evidence to the Treasury Committee a few months ago and he said it was not an issue about the perimeter, but about the failure to use the enforcement and supervision powers that the FCA already had. I understand what he means by that. He is saying that if the FCA had acted on the reports that it had received, a great deal less damage would have been done and the taxpayer would not be faced with the compensation bill set out in the Bill. Even though I understand the point he made, the perimeter is still relevant because it informed attitudes inside the FCA on how alarmed it should be about calls reporting concerns about LCF and whether it should act. That behaviour was influenced by the fact that the calls were about products that were not regulated.
How should the Government and the FCA respond to the issue of regulated companies and unregulated products? In theory, one response could be to say that regulated companies can only sell regulated products, but that would involve a major extension of regulation. That is not to say that that is necessarily wrong, but it would be a big step. For example, foreign exchange trading is not regulated but it is carried out by every high street bank in the country and they are, of course, regulated entities.
If the answer is not a major extension of regulatory responsibilities, what is it? Is it the Government’s position that there is no need to look at this because this was such a one-off event that cannot be repeated? How can we be sure of that? We asked the FCA this morning whether this could happen again and, understandably, the witness from the FCA said that he could not tell us for sure that it could not.
Gareth Thomas
My right hon. Friend is rightly dwelling on the issue of the perimeter. May I give him another scenario that suggests that there might still be reasons to be concerned about whether the FCA has got the perimeter point in Dame Elizabeth Gloster’s report? Let us imagine that the FCA had investigated a financial services business that was recommending one thing to its customers but only 12 months later was doing the complete reverse. The FCA, having looked at it initially, says, “We’ve looked at it already. We’re putting a perimeter around that. We’re not going to consider what happened 12 months before in the context of this decision.” Were that to be a live situation, would it not suggest that the FCA had not grasped the perimeter point that Dame Elizabeth Gloster was making?
Mr McFadden
My hon. Friend makes a very strong point. The question of the perimeter is inescapable. One of Dame Elizabeth’s recommendations is that the Government consider the FCA’s remit, and the Government have said that they accept all her recommendations. The Minister said in his evidence to the Select Committee that this cannot be pinned on the perimeter, as it were, but as a conclusion of what has happened the perimeter must be considered. The Government have accepted that.
One way to deal with this is to say that regulated firms and regulated products must be brought together—I shall be grateful for the Minister’s response on that—but if that is not deemed to be the right response how will the question of the remit and the perimeter be responded to? At the heart of this failure is the halo effect of a regulated firm selling unregulated products.
Recommendation 13 is about ensuring that the legislative framework keeps pace with the sale of products through technology platforms. This field of activity is growing daily. It is driven by technological innovation—the movement of more and more activity online—and perhaps by the increased time people have had during the lockdowns to invest online. I do not want to try your patience, Ms Ghani, by delving too deeply into that today, but I think that this issue will occupy the House and this Minister in particular over the next couple of years. We will have to return to it again and again in the House, but recommendation 13 is precisely about legislation on selling things through technological platforms, and the Government and the FCA will have to adapt to it or they will fall behind the reality of the market and of financial crime.
Most of these issues have been put in the hands of the new chief executive, Nikhil Rathi, and the trans-formation programme to which the Minister referred on Second Reading. How are we to know that the 13 recommendations have been implemented? It is easy when a report is published to say, “We accept the findings.” The key is: are they followed through and properly implemented?
Dame Elizabeth’s report should be more than a series of individual recommendations. As she said this morning, it should result in a culture change. Much more communication needs to take place between different parts of the FCA while, crucially, not dropping the ball on regulated firms and unregulated products.
It is unfair of any of us, in government or in opposition, to load more responsibilities on to the FCA if it does not have the resources to fulfil them. We are clear in our amendment that the resources of the FCA have to be covered. Does the FCA have the resources to meet the ever-expanding list of responsibilities, including those on-shored as a result of our departure from the EU? It is funded through a levy on the sectors for which it is responsible. Is the levy giving it enough resources?
The failure of LCF exposed such a degree of dysfunctionality that it prompted the question: can the FCA really do its job? If not, the Government have to act because the public need the protection of a powerful regulator. The imbalance of information between the sellers of financial services products and the buyers absolutely demands that. This amendment is aimed at our receiving a report on the 13 recommendations and on their implementation by both the FCA and the Treasury. Its acceptance would provide Parliament and the public with a mechanism to ensure that statements saying that the recommendations had been accepted had actually been followed through and action taken.
Peter Grant
I am pleased to speak in support of the amendment. There are two questions if the Government wish to reject it. Assuming that no one has any objection to the idea that somebody should keep an eye on what the Government are doing in response to the Gloster report—that would be a good idea—the questions are who should they report back to and when should they report back. Their response to those questions might provide the only grounds on which they could object to the amendment.
There can be no doubt that the Government must report back to the House of Commons and to Parliament. I know I might not look it—perhaps I do—but I am old enough to remember cases like Polly Peck, one of the great corporate scandals of earlier generations. In response to that, we had the Cadbury report that, in effect, invented the concept of corporate governance. It seems obvious now, but one of the key principles that came out of the report is that once the directors who are supposed to be in charge of a company have taken a decision for something to happen, they cannot just walk away. They have to put a process in place by which they, as the directors, individually and personally, can be satisfied that what they say should happen does happen.
The House of Commons in the UK Parliament is not a board of directors as such, but we still have to take responsibility—all 650 of us, individually and collectively—for making sure that, having had assurances from the Government that they will act either directly or indirectly through agencies such as the FCA, they will do things to sort out a £1 billion scandal. We are the ones who ultimately have to hold them to account for that.
I am not saying that a report or a statement to Parliament is the best possible way of holding the Government to account. Frankly, it is a joke of a holding to account, but it is the best that we are allowed in this place. That is why it is included in many of our amendments. Any argument from the Government that any way of reporting back on such vital recommendations that is anything less than regular statements to the full House of Commons and making themselves available to take questions from, if we are lucky, just 5% of all elected MPs, is just not acceptable.
Secondly, when should the Government report back? That is why I made a point of asking Dame Elizabeth whether six months from now—12 months from the original recommendations—is a reasonable time in which to expect significant progress. Dame Elizabeth made it clear that she cannot tell us about parliamentary procedure and all the rest of it, and I accept that. However, her view was clear that, in six months from now, it would be reasonable to expect there to be significant progress on a significant number of the recommendations. At that point, the House of Commons should get a report back from the Minister to explain what has happened and if it has not happened yet, when it will happen. Most importantly, he will explain why what has not happened has not happened. We have had far too many examples of Ministers giving assurances in good faith but of things not happening or, if they did happen, of their taking far longer than they should have done.
Time matters. None of us knows whether there is another London Capital & Finance already happening, and we heard from witnesses who are convinced that it is. There could be another Blackmore Bond, Basset & Gold or you name the corporate investment mis-selling scandal. It could be happening again right now. We do not know how many of them are on the go just now already swallowing up people’s pensions and savings. If the Minister is not prepared to commit to giving an update within six months, will he tell us what timescale he thinks is reasonable for us to expect real change? “In due course” is just not good enough for people who might be losing their investments now even while we dither and dally about what to do next.
Gareth Thomas
I rise to support amendment 2, in the name of my right hon. Friend the Member for Wolverhampton South East. I share some of the frustration that the hon. Member for Glenrothes aired: this is the only route available to the Opposition to signal to the Government and the FCA the need to provide a continuing update on their progress in implementing the lessons that have been learned from the LCF scandal. My right hon. Friend the Member for Wolverhampton South East went through some of the many issues and recommendations that Dame Elizabeth Gloster’s report highlighted, but let me pick out five in particular.
First, the FCA failed to consider LCF holistically. Indeed, as my right hon. Friend pointed out, we got Dame Elizabeth to emphasise again in the evidence session today that the most significant issue was a very restricted approach to the regulatory perimeter. I will come back to that point.
Secondly, the FCA’s policy documents were unclear on the handling of key questions. Thirdly, its staff had not been trained sufficiently in various key and crucial matters. Fourthly, there was a series of gaps in the law that needed fixing in order to enable proper regulation. Fifthly, the issue that my right hon. Friend touched on last was the FCA’s scope and capacity to intervene effectively on consumers’ behalf—did it have sufficient powers?
Let me turn to the first of those concerns—the restricted approach to the regulatory perimeter and whether the FCA has learned to consider issues to do with consumers holistically. The example that I gave when I intervened on my right hon. Friend was that of a financial service business that has recommended to its customers something that the FCA has approved, only for it to come down the line, 12 months later, and suggest the reverse approach. That is effectively what is happening in the case of Liverpool Victoria. I do not want to test your patience too much, Ms Ghani, but let me clarify that example very briefly.
Liverpool Victoria converted to a company limited by guarantee from a friendly society two years ago. The FCA looked at it—
The Chair
I am curious as to how the hon. Gentleman will keep this in scope, but I am listening attentively.
Gareth Thomas
I am grateful for your patience, Ms Ghani, and I will not test it much more.
The FCA looked at that two years ago and approved it. Crucially, at the time, the chair and the leadership of LV said, “This has got nothing to do with demutualisation.” Where the regulatory perimeter issue comes in is that the FCA will not look at what happened two years ago in the context of what Liverpool Victoria is now trying to do. It is surely legitimate to be concerned about Dame Elizabeth Gloster’s crucial finding that the FCA had not worked out a way to handle decisions being taken by businesses holistically. That has not been properly grasped, and I gently suggest that Liverpool Victoria is the key evidence in that respect.
On the question of the FCA’s policy documents, the way they were used by staff, and whether they were appropriate to LCF’s challenges, they clearly were not up to the job, but at least there was a policy document. In the case of Liverpool Victoria, there does not appear to be any policy document on the FCA’s handling of the demutualisation. That raises a bunch of serious questions, albeit not within the scope of our conversations today.
Clearly, there is a question as to whether staff have been trained appropriately to handle the 600-plus phone calls that customers of LCF made to the FCA, raising their concerns about the products that were on offer, and that they had invested in and were buying. Again, one would have thought that the FCA would have grasped that concern and made sure that staff were trained properly on the big issues of the day affecting the FCA.
Again, I am surprised. I use the example of Liverpool Victoria again. There has been no looking back at previous demutualisations and at how the consumers’ interest was protected in that respect. So even if the FCA has highly capable staff, as I am sure it has, given that they have not looked back, one wonders how they can possibly be trained to think through properly all the key questions.
One of the issues that I raised in an intervention on the hon. Member for Glenrothes was about the extent to which the FCA has learned from the LCF scandal that perhaps it needs not to be quite so close to the boards and management of financial services businesses. Perhaps it needs to move just a little bit more towards having a little more scepticism on behalf of the consumer.
So imagine my concern when I discovered that one of the regulators involved in handling the consumer interest in the Liverpool Victoria case has met the management of LV 35 times and not once with any consumers of the company. That would seem to suggest that they have not learned the lessons.
Lastly, I just want to suggest that there is a series of gaps in the law that need fixing. My right hon. Friend the Member for Wolverhampton South East rightly drew attention to the concern in the LCF case about who regulates mini-bonds. It is gratifying to hear that there is a working group looking at the relationship between HMRC and the FCA in this regard. However, the Minister will not be surprised to learn that I think there is a series of legislative gaps regarding how consumers are handled during the demutualisation of a major financial services business, but I would tempt your patience, Ms Ghani, were I to go down that route. Fortunately, as the all-party parliamentary group for mutuals is meeting the Minister, it will have an opportunity to go through those issues and I very much look forward to that occasion.
John Glen
I will obviously now move to consideration of amendment 2. I am grateful to the right hon. Member for Wolverhampton South East, who is an experienced and distinguished former Minister himself. He referred to the catastrophe word bingo. I do not want to address that particularly, but I will address the amendment, which seeks to add a requirement for the Secretary of State to publish a report setting out progress on the implementation of the 13 recommendations in the report by Dame Elizabeth Gloster.
I will also tell the right hon. Gentleman precisely what we have done, what I think the FCA has done, and where I think that takes us, and I will address his concerns, raised throughout this debate, on the perimeter, on the halo effect and some of the points that Dame Elizabeth Gloster made.
The Treasury accepted Dame Elizabeth’s four recommendations regarding the Treasury and we welcome the FCA’s commitment to implement all nine of her recommendations that apply to it. We are committed as a Government to act on Dame Elizabeth’s recommendations, to ensure that the regulatory system maintains the trust of consumers. I submit that progress has already been made in implementing the recommendations and I set that out during my evidence session for the Treasury Committee’s inquiry into the FCA’s regulation of London Capital & Finance on 21 April.
Regarding Dame Elizabeth’s recommendations for the FCA, I obviously welcome the FCA’s acceptance of them, and I am sure that the Committee will have noted its commitment to report publicly on its progress in implementing these recommendations and indeed on its wider transformation programme. I am sensitive to the criticism that this is an empty exercise where there is nothing specific that Parliament and Members can address. I would therefore draw attention to the fact that Charles Randell, the current chair of the FCA, provided a detailed update in his letter to me on 16 April.
The letter has been published on the FCA’s website and sets out the comprehensive improvements that have already been delivered. The right hon. Member for Wolverhampton South East rightly referred to a number of those, and the hon. Member for Harrow West mentioned training and the empowerment of staff to make decisions and respond to those calls and representations from consumers. A further update will be provided in the FCA’s annual report, which will be published in July, and the FCA is committed to providing updates every six months until the programme is delivered. I would also note that the Treasury Committee intends to publish its report on the FCA’s regulation of LCF before the end of June, which the Government and the FAC will no doubt respond to as appropriate.
The right hon. Member for Wolverhampton South East raised Dame Elizabeth Gloster’s recommendations concerning the perimeter and remit. In essence, what she said was that the FCA had a responsibility to deal with a firm that it regulated, but was conducting unauthorised activities. As the right hon. Gentleman will know, I believe that in financial services legislation that we took through Parliament together, we gave the FCA responsibility to remove the names of firms that do not conduct any activities but are regulated under the FCA, and so remove the halo effect. I watch and monitor the transformation programme very closely, but I think that the amendment would create an additional and unnecessary administrative burden given the commitments that I have set out, and would distract from the work to deliver the recommendations themselves.
I wanted to correct one thing I said in my earlier speech. I referred to eight firms rather than eight years; we looked across mini-bonds over eight years, and there are probably more than eight failed firms. I wanted to put that on record.
There is no complacency on my part regarding how important it is that these 13 recommendations are implemented fully. We will then see how things look thereafter. On the perimeter specifically, I met the chief executive of the FCA on 20 January and the minutes of that discussion were published on 25 February, and I remain open to those conversations going forward.
Given those reassurances, I hope that hon. Members will not seek to press the amendment.
Mr McFadden
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
John Glen
London Capital & Finance was an FCA-authorised firm that primarily offered an unregulated investment product, commonly known as mini-bonds, to retail consumers. It entered administration in January 2019, impacting 11,625 people who invested around £237 million. The Serious Fraud Office and FCA enforcement have launched an investigation into individuals associated with LCF. The Financial Reporting Council has also launched investigations into the audits of LCF. As the Committee will know, Dame Elizabeth Gloster led that independent investigation, which also revealed shortcomings in the FCA’s supervision of LCF. A complex range of interconnected factors contributed to the scale of losses for LCF bondholders, creating a situation that is unique and exceptional. While other mini-bond firms have failed, LCF is the only one that was authorised by the FCA and sold bonds in order to “on-lend” to other companies. As I have said before, LCF’s business model was highly unusual both in its scale and structure. In particular, it was authorised by the FCA despite generating no income from regulated activities. Bondholders were badly let down by LCF and the regulatory system designed to protect them, and I announced that the Treasury had set up a compensation scheme for bondholders who suffered losses after investing in LCF. The scheme will be available to all LCF bondholders who have not already received compensation from the FSCS and will provide 80% of the compensation that they would have received had they been eligible for FSCS protection up to the maximum cap of £68,000. The LCF scheme is expected to pay out £120 million in compensation to around 8,800 bondholders in total. Where bondholders have received interest payments from LCF or distributions from the administrators, Smith & Williamson, these will be deducted from the amount of compensation paid.
There are two main aspects of clause 1, which I shall explain in turn. First, legislation is required to establish the financial authority to enable the Treasury to incur expenditure in relation to the scheme. That will ensure that the Treasury complies with the 1932 Baldwin concordat and the principles of managing public money. Clause 1 provides the Treasury with the spending authority that will enable payments to be made to eligible bondholders. We are working on the details of that scheme but I hope that it will be possible to reimburse them within six months of Royal Assent.
Secondly, the Treasury intends to use the process set out in part 15A of the Financial Services and Markets Act 2000 to require the Financial Services Compensation Scheme to administer the scheme on behalf of the Treasury. Clause 1 disapplies the FCA’s rule-making requirement so that existing rules relating to the FSCS can be applied to the scheme without the need to undertake a lengthy consultation. That reflects the fact that existing rules have already been consulted on and avoids any further unnecessary delays to compensation payments. In addition, as the Treasury will pay for the scheme, there is not the same obligation to consult FSCS levy payers as there would be for rules that sought to make use of FSCS funds raised by the levy.
I submit that clause 1 is an essential step in the introduction of the LCF compensation scheme without which compensation payments cannot be made. I therefore recommend that the clause stand part of the Bill.
The Chair
I understand that the right hon. Member for Wolverhampton South East wishes to make a short contribution.
Mr McFadden
It is really just a question. The Committee has received a number of representations from LCF investors about this 80% level. What is the Minister’s response to those representations? If LCF investors were here and were allowed to speak, they would say, “Why is it that those who invested after getting financial advice get 100% of the FSCS level because financial advice is a regulated product and therefore covered by the FSCS in full but we are getting 80% of that level?” What is his response on this differential treatment of the two types of investors?
The Chair
Before you respond Minister, I call the hon. Member for Glenrothes to make a short contribution.
Peter Grant
The Minister referred to the fact that there are ongoing investigations in relation to LCF. Does he recognise that some of the individuals and intermediary businesses that are now under criminal investigation for their part in LCF also played a major part in other mini-bond scandals that I have written to him about separately? Although he made the point about the uniqueness of LCF, the aftershock of LCF is very definitely being felt in other mini-bond scandals that have happened since then.
John Glen
Out of courtesy, I am very happy to respond to my colleagues. The right hon. Member for Wolverhampton South East asked why the 80% figure was not 100%. As I have tried to explain through the submissions that I have made, the Government have been trying throughout to balance the interests of bondholders and the taxpayer to ensure that we have a fair level of compensation in respect of the financial losses incurred. The scheme is based on the FSCS level of compensation but, as he knows, it is 80% up to that cap of £68,000 to reflect the unregulated nature of the LCF product.
I emphasise that it is imperative to avoid creating the misconception that Government will stand behind bad investments in future, even where the FSCS does not apply. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments thinking that the Government will provide compensation when things go wrong. To avoid creating that misconception, and to take into account the wide range of factors that contributed to the losses that the Government would not ordinarily compensate for, the Government will establish the scheme at the level of 80% of LCF bondholders’ initial investment up to the maximum of £68,000. With any investment, there is clearly a risk that sometimes investors will lose money, and the Government and taxpayer cannot and should not be expected to step in and compensate for every failure and every loss. It would not be right or fair for investors in non-regulated products to receive fuller compensation than those who have invested in regulated products, for which the maximum amount is capped at £85,000 under the FSCS.
On the remarks of the hon. Member for Glenrothes about the individuals involved in an ongoing serious fraud inquiry, I am not familiar with the detail, but obviously I am happy to receive any representations. I hope that brings satisfaction to the Committee.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Clause 2
Loans to the Board of the Pension Protection Fund
Matt Rodda (Reading East) (Lab)
I beg to move amendment 3, in clause 2, page 2, line 7, at end insert—
“(3) No loan shall be made under this section until the Secretary of State has laid before Parliament an impact assessment of the means of repaying the loan, including specifically the impact on pension schemes from the Fraud Compensation Fund levy.”
This amendment would prevent the Secretary of State from making a loan to the Board of the Pension Protection Fund for the purpose of compensating eligible pension schemes until he or she has laid before Parliament an impact assessment of the Fraud Compensation Fund levy on different pension sectors.
The Chair
With this it will be convenient to discuss the following:
Amendment 5, in clause 2, page 2, line 7, at end insert—
“(3) Before making a loan under this section, the Secretary of State must lay before Parliament an assessment of the levels of fraud in the pensions system.”
This amendment would require the Secretary of State to publish a report on the levels of fraud in the pensions system before making any loan under new section 115A of the Pensions Act 2004.
Amendment 6, in clause 2, page 2, line 18, at end insert—
“(5) Within twelve months of this Act receiving Royal Assent, the Secretary of State must publish a report on the operation of the Fraud Compensation Fund in connection with any loan made under section 115A.”
This amendment would require the Secretary of State to publish a report, within twelve months of this Act being passed, on the operation of the Fraud Compensation Fund in connection with any loan made to the Board of the PPF under new section 115A of the Pensions Act 2004.
Matt Rodda
We have tabled a number of amendments seeking to improve the Bill. Amendment 3 seeks to ensure that we have clarity and certainty before taking the step of asking key pension schemes to fund the majority of the bill for the Fraud Compensation Fund. It is perhaps worth reflecting on the evidence we heard this morning, which was so illustrative on this issue. One socially important pension scheme—the People’s Pension fund, which we heard about today—was asked to put forward a large amount of money to help support the compensation fund. The fund is known to take a large number of people—many of them women, on low incomes or self-employed—who have started to save for a pension through auto-enrolment. I am sure the whole Committee will agree that it is a worthwhile objective of Government policy to encourage pension savings by a wide range of people, not just the wealthier sector of the community.
Specifically, amendment 3 would prevent the Secretary of State from making a loan to the board of the Pension Protection Fund for the purpose of compensating eligible pension schemes until he or she has laid before Parliament an assessment of the impact of the Fraud Compensation Fund levy on different pension sectors, thereby allowing Parliament to consider the issues affecting them. That is essential because, as we have heard, the burden of compensating victims of fraud is falling disproportionately on certain groups. As we heard this morning, just two schemes—the People’s Pension and the National Employment Savings Trust, which are both not-for-profit operators—have historically ended up paying the lion’s share of the fraud compensation levy, despite their size and the fact that there is no tangible connection between those funds and the fraud that we are trying to address.
It is perhaps helpful to mention the figures again, for the sake of clarification. To recap, the PPF’s 2019 annual report and accounts reported that the FCF levy raised £6.9 million. What is truly surprising to casual onlookers, however, is that 37% of that was paid by the two pension schemes that I mentioned—NEST and the People’s Pension—even though they managed only £20 billion of the roughly £2 trillion of assets held in UK workplace pensions. They were managing just 1% of the total, which is a tiny amount, as I am sure everyone will agree. There is clearly a mismatch, and I am sure that the Minister, who has obviously followed this in great detail, will want to respond because something strange seems to be going on. With the figure now enlarged significantly to hundreds of millions of pounds, and with the potential repayment of the loan via an increased levy, it is understandable that the schemes are anxious about where the burden of repayment will fall. That is a fair point, and one that I am sure we would all want to consider thoroughly.
We have been promised a review of the levy later this year, and I appreciate that the Government are willing do that. However, it does not seem right that, given the significant sums involved for the loan, the legislation should proceed without pausing—all we are asking for is a pause—to consider its impact. Both of the pension schemes I have mentioned play a hugely important part in expanding pensions coverage, and I am sure that members of the Committee are aware of the national policy challenge of encouraging more people to save for their pensions. We all want a much larger proportion of the community—ideally, everybody—to have access to a pension scheme that they can save into as well as the state pension. The two organisations I have mentioned have many low-income savers who I am sure we want to support. It is crucial that we consider the long-term viability of those schemes as we consider the structure of the levy, and that the long-term viability of the two pension schemes is not jeopardised.
A fundamental change is under way and it needs to be addressed. I hope that the Minister will reflect on that. First, the scope of who is compensated for fraud has been drastically expanded by the High Court judgment. Secondly, the industry structure has radically altered since the levy was first designed. Both of those points are important, and combined they will, potentially, have a huge impact on the rest of the sector. Careful consideration neds to be given to that. An impact assessment is necessary to give parliamentarians, sector experts and decision makers in the round a broader understanding of this complicated situation.
The Government have a duty to make sure that not-for-profit operators and other legitimate, law-abiding companies and mutuals, as my hon. Friend the Member for Harrow West has said, are not unfairly affected or carrying the burden of responding to the need to pay out compensation for scams. The savers and pensioners who have invested in that way should not be forced to pay higher charges as a result. I appreciate the pressure on time and hope that the Government will consider the amendment in great detail.
Peter Grant
The official Opposition’s spokesperson gave very clear reasons why there is benefit in our agreeing to the amendment. I would like to anticipate the reasons that the Government will give for rejecting it and explain briefly why those reasons are not valid—I nearly said mince, but I do not know if that would be understood.
I hope that the amendment will be regarded, not only today but in the future, in the same spirit as that with which it has been tabled. I can almost see someone at the Dispatch Box, thumping the table in response to a question, saying, “Of course, Mr Speaker, we all know that the official Opposition attempted to delay implementation of the scheme.” Amendment 3 could be misrepresented in that way, but that is clearly not what it seeks to do. It asks the Government to publish the results of something that any responsible Government would do before they created the terms of a loan. All it asks is that, having done an assessment—which surely they will—they tell us the results.
The impact on particular kinds of pension schemes is important, because it could be argued that the reason the clause is needed is that a previous Government did not properly assess the impact of the changes they made in 2015 on certain types of pension holders. That is where pension liberation and pension liberation scams came from. I hope that the Government have learned their lesson. If they do not assess in more detail the impact of major changes on particular types of investors and pension holders, they may be saving up problems for the future.
I will briefly mention the other two amendments. The Government should do what is proposed by amendment 5. Do they have any idea of the level of pension fraud in the United Kingdom right now? They should.
The Minister indicated this morning that the measure proposed by amendment 6 might already have been done by someone else. If that is the case, there is nothing to stop him taking that document and putting a written statement before the House, saying, “I have received the report of xyz this morning and I endorse its contents.” A report is given significantly more weight if it is put on the record in that way. Presenting an annual report also gives Ministers an opportunity to say, “I am unable to endorse its contents, for the following reasons,” but endorsing it gives it a gravity that it might not otherwise have had. The Minister may have noticed that I am no great fan of this Government or this place, but if a Minister of the Crown lays before Parliament a statement taking responsibility for and endorsing the report of a body that reports to their Department, that carries more weight than the report simply appearing somewhere in the pages of the media a day or two later.
The Chair
In case any Member did not quite understand what I said at the top, all of the proposed amendments to the clause are being debated now, including amendments 5 and 6. Mr Rodda, to confirm, are you aware of that, and do you wish to speak to amendments 5 and 6 now?
Matt Rodda
I am very grateful, Ms Ghani. I would like to speak to amendments 5 and 6. Amendment 5 obviously covers a very different area. I sponsored it because I think that the central principle of this country’s pensions system—I am sure the Committee agrees—is that people who work hard all their lives and who contribute and save diligently are able to receive a decent pension in their retirement. I hope there is cross-party agreement on that. I am sure there is; historically, that has been the case.
In recent years, however, it has become clear that an increasing number of pensioners—and, indeed, people approaching retirement, who are also an important group and are in some ways quite vulnerable—have been set back significantly as a result of what are commonly called pension scams. As the Bill Committee, we have a duty to protect people and to help them prepare for their retirement. Amendment 5 therefore seeks to require the Secretary of State to publish a report on the levels of fraud in the pensions system before making any loan under new section 115A of the Pensions Act 2004. We believe that that is a crucial first step in tackling pension scams. Obviously, there are a whole series of ways to tackle them, and we appreciate that the Government are taking other steps. This is important because the consequences of the scams can be utterly devastating for those directly affected. They are also potentially expensive and damage trust in the pensions system as a whole and the operation of many businesses in the sector. It is critical that we have a system that is robust and protected against scams. The Bill highlights the consequences for everyone, including other scheme members, when fraud is allowed to spiral unchecked.
The pandemic has, sadly, given rise to an increase in fraud, as many criminals have taken advantage of the confusion and, in some cases, the isolation of vulnerable people to prey on those who, sadly, can fall victim to these dreadful crimes. However, pension scams were already on the rise. It is worth noting that, since George Osborne’s pension freedoms were introduced in 2015, fraudsters have taken advantage of confusion around what the rules precisely allow. We warned at the time that those reforms would significantly increase that risk. The Government must acknowledge, as I am sure they will, the failings of pension freedoms and their associated tax problems, as in the case of the NHS.
One of the most egregious abuses of pension freedoms has been a scam by sophisticated criminals who trick people into accessing their pensions before the legal age of 55, relying on confusion about the rules, and then abscond with the funds, leaving people in a desperate situation. In some cases, the victims suffer a double injustice: not only do they lose their entire pension pot in some cases; they are also aggressively pursued by HMRC for tax penalties, having broken the rules on money they no longer have. There are some truly heartbreaking cases of innocent people being misled and sadly losing their life savings, as well as being left with tax debts of tens of thousands of pounds.
We would like reassurance that the Department for Work and Pensions and the Treasury will look into tackling this problem in the wake of the Dalriada judgment last year. The Government could provide that reassurance by supporting amendment 5 as a crucial first step. They should also find a way for HMRC to work with the authorities to make sure that these crimes are properly investigated, targeting the promoters, not the victims, and recognising the dreadful circumstances in which those victims find themselves through little fault of their own.
The High Court judgment that is at the centre of the loan we are discussing today is linked to exactly that type of fraud. In its recent report on pension freedoms fraud, the Select Committee on Work and Pensions recommended that particular aspects of pension freedoms and the Pension Protection Fund be reviewed in further detail in that light.
We agree with the Select Committee. Our amendment, which calls for an assessment, could form an important part of tackling the issue. It is important that the Government publish the report the amendment seeks, in order to show the public that they are not simply looking at the symptoms of fraud, but tackling the causes. I am sure the Minister will want to consider that point. The Government should set out an action plan to protect pension savers and an assessment of the level of fraud in the system as part of that work.
I know the Minister campaigned to tackle cold-calling last year in the Pension Schemes Act 2021. The Bill quite rightly tackled telephone cold-calling, but people can be approached in a cold manner online. I ask the Government to consider that avenue for scams. There has been some mixed messaging, but I hope the Minister, who I know is in touch with the sector, will take the point on board. I have written to the Secretary of State for Digital, Culture, Media and Sport to ask that the Government act on this point and include it in the online harms Bill, which is an appropriate place to tackle these serious scams, alongside many others.
Pension savers are particularly vulnerable in the few years just before retirement, when savings have accumulated but before they have actually retired. Pension transfers, especially for those in defined-benefit pension schemes, can be targeted by criminals, alongside pensions liberation fraud, which we are talking about today. This is where the Money and Pensions Service should play a bigger part. As Members will know, the service is a Government-funded body that offers free pensions advice to people aged over 50, through its Pensions Wise service.
Is it possible for Pensions Wise to play a bigger role? I hope the Minister will consider that point. It could be helpful and supportive to individuals, as well as helping the operation of the sector—the businesses that are operating legitimately, as the vast majority are.
It was disappointing that the Government rejected a proposal in proceedings on the Pension Schemes Act that would have booked a default Pensions Wise appointment for everyone in the five years prior to their retirement. The amendment was put forward by the Chair of the Work and Pensions Committee, my right hon. Friend the Member for East Ham (Stephen Timms), and was supported by the Opposition. It would have meant that everybody would automatically get some basic knowledge about where they stood, better protecting them against scams.
Finally, I would like to share some research from the People’s Pension and the Police Foundation that demonstrates the scale of the problem and why we need to act urgently. The true level of pensions fraud in the UK, though large, is unknown, but could it be as high as £14.6 billion, based on the average pot size of £63,700.
I hope the points I have set out are helpful and that the Minister will consider them. We would like to see this area addressed by the Government. I urge the Minister to respond to my points.
Ms Ghani, should I speak to the other amendment now?
The Chair
The amendments are grouped, so they are all to be debated together. Do you have a contribution on amendment 6?
Matt Rodda
Yes. I will move straight on. I appreciate your tolerance.
Amendment 6 seeks to perform another important role—ensuring that the PPF and the Fraud Compensation Fund work effectively and efficiently for all parties, which I am sure everyone here would support. The amendment would require the Secretary of State to publish a report, within 12 months of the Act being passed, on the operation of the Fraud Compensation Fund in connection with any loan made to the board of the PPF under proposed new section 115A of the Pensions Act 2004.
In the debate on amendment 3, I set out why we needed a fuller understanding of the way the levy works and its impact—I mentioned the two not-for-profit organisations that are doing such valuable work—in order to improve the situation for savers and pensioners. I will not go into the detail of those arguments again, but they are applicable and equally important for this amendment.
It is crucial to highlight the context in which we put forward the amendment. A very limited number of schemes are currently propping up the fraud compensation levy by paying disproportionate contributions, even though they do not have a meaningful connection to fraud at this time.
These are crucial funds that support large numbers of savers—indeed, increasingly so in this country, as we enjoy the success of auto-enrolment, which is a great step forward for pension savers, and indeed future pensions across the country, providing greater access to pensions. Millions of workers across the country, at different stages of their lives, pay into these schemes and rightly expect their pension pots to be given the best possible chance to grow. Yet because the levy is passed on to savers through charges, it is current Government policy to ask savers to do the right thing in order to pay for the damage caused by criminals. As we heard earlier, this is not happening on a small scale but on quite a large scale.
Again, the PPF reported in its 2019 annual report and accounts that the FCF levy raised £6.9 million, 37% of which is paid by NEST and People’s Pension, as I said earlier, despite their having a very small share of the overall assets—around 1%. This issue disproportionately affects these very worthy organisations, which are helping so many people.
Another factor that makes a review after 12 months so important is that the High Court only recently ruled to drastically expand the scope of those who may qualify for compensation for pensions fraud. As a result, the full scale of the situation might not be immediately obvious, which is yet another reason why the Government might want to consider amendment 6, as I hope they will.
The Secretary of State has a responsibility to ensure constant monitoring and assessment. Our amendment would help her and her team of Ministers to perform their roles in that way. Without a proper assessment, the Government could be taking us down a path towards an unsustainable pensions sector, in terms of fraud compensation, and severe problems that will have to be rectified at greater cost in the future, which obviously none of us wants.
Finally, another court judgment could change things again, if it were to rule differently and the lawyers then pointed to a number of additional issues related to the ruling that had not yet been clarified. As a result, the pensions sector is still having to work under a degree of uncertainty, and obviously it is a central principle of any wise policy to try to reduce uncertainty. I hope that a report could to some extent alleviate that uncertainty. I appreciate that it would not completely resolve it, but it might be of assistance to businesses in the sector that are providing the services that we value so much, so I hope that the Minister will consider our amendment.
Gareth Thomas
On a point of order, Ms Ghani. You were very good at the end of the evidence session with the FCA to point out that the director, who was present, agreed to provide two pieces of written correspondence to me and to the whole Committee. As I understand it, that has not yet arrived. I have some sympathy for the FCA, given the timetable on which we were asking it to provide that information, but I wonder whether the Clerk might gently press the FCA for that information at some point this week.
The Chair
Thank you, Mr Thomas; your point of order is duly noted. I believe that the Clerk will indeed be pressing for that data as soon as possible.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
I gather that we have a possible vote in the House, so I will attempt my entire response in 10 minutes. Before I do so, it is right that, on behalf of the entire Committee, I thank you for chairing the Committee, Ms Ghani. As the former ports and shipping Minister, and in a month when we celebrate the first female Royal Navy captain, some might argue that you are a well-qualified captain to keep what is—let us be honest—a motley crew in order. If you run for Speaker, Ms Ghani, I will definitely be supporting you.
Let me discuss what clause 2 does and does not do. It creates a power to make a loan to the board of the Pension Protection Fund, following the decision of 6 November 2020 in the case of the PPF v. Dalriada. It achieves that by inserting a new section into the Pensions Act 2004 to provide the Secretary of State with a power to loan money to the board of the PPF.
I think it is fair to point out to the Committee that the clause deals with matters that are predominantly––almost entirely––to do with 2010 to 2014. Many would wish to make this a case about pension freedoms, when in fact pension freedoms post-dated these matters. It is clearly a serious and important matter, and, following a court decision, the Government have accepted the entirety of that decision.
The practical reality is that the Fraud Compensation Fund has assets of £26.2 million, and the potential liability arising from the court judgment is £350 million. I accept that points have been made in respect of how the loan is to be repaid in the longer term and I will address that, but I shall now turn briefly to the amendments.
Amendment 3 seeks an impact assessment. With great respect to the Members who tabled that request, it is utterly unnecessary. It is, in fact, precluded by the decision of the House on section 22 of the Small Business, Enterprise and Employment Act 2015, of which I am sure Members are acutely aware. It states that impact assessments are not required in respect of levies or other such charges in these particular circumstances.
Secondly, the clause is implementing a court judgment.
Peter Grant
Will the Minister clarify his last comment? Did he say that impact assessments are not required or that they are not permitted? Surely, if they are not required, we can still ask for one if we think it would be useful.
Guy Opperman
That is a very fair question that I shall attempt to answer while I am on my feet, but I believe that it is not required. Section 22 of the 2015 Act excludes impact from the definition of regulatory provision, so I believe that it is an exclusion rather than a requirement. If I am wrong in any way, I shall write to the hon. Gentleman and correct myself. I may be corrected while I am on my feet, although in the brave new world of covid, that is quite difficult, as I am sure that he understands.
Clearly, if we were to do an impact assessment at this time, it would fundamentally delay the implementation of payment to members, and the blunt truth is that the PPF will run out of money by October if we do not progress this legislation. The levy increase will be consulted on post the passing of this Bill. It will need consultation, regulations and debate in the usual way.
Amendment 5 would also delay the progress of this matter. The Government will respond to the Work and Pensions Committee, to which I gave detailed evidence, before the end of the summer term. The full response of the Government in respect of all matters relating to such scams will be made before the end of term. We are already progressing Project Bloom and there is the work of the Money and Pensions Service that was introduced by my hon. Friend the Economic Secretary to the Treasury in the previous Act that we worked on. We have produced section 125 of the Pension Schemes Act 2021, which Her Majesty signed on the dotted line in early February, and the consequential transfer regulations that we have consulted on over the past month to ensure that pension scams are prevented on an ongoing basis.
I have been asked to address other matters. It is clear that Ministers are engaging with various organisations, including Google and Facebook. The two of us have made our views very clear to those organisations about how they should regulate themselves. I agree that Pension Wise should be used more but, with great respect, I disagree with the Chair of the Select Committee’s proposal for the many good reasons that I outlined in the debates on Report and Third Reading of the 2021 Act. Clearly the work that we are doing jointly with the Treasury and other organisations, including the FCA, on stronger nudges towards using Pension Wise and other things will make a massive difference.
On amendment 6, there is already an annual report. In true Chamberlain style, I have it here in my hand: the annual report of the Pension Protection Fund, which is published every July. I know, Ms Ghani, that you will have read the most recent version, and will be looking forward with bated breath to the July 2021 report, which will specifically address the issues whose importance today’s witness made very clear.
In those circumstances, I invite hon. Members not to press their amendments.
The Chair
Let us try to ensure that we get through this portion of business before the Division. The Opposition spokesperson may of course respond, but let us keep it brief.
Matt Rodda
I am grateful to the Minister for his response. I feel that he is being somewhat generous in his description of the Government’s assessment of this problem and the level of response. I urge him to redouble his efforts and to focus on some of these points in further detail.
I think that the hon. Member for Glenrothes is right to draw attention to the subtle legal difference on the issue of the impact assessment. Surely, given the scale of what is going on, it would be wise to carry out an impact assessment. I appreciate the pressure of time, but perhaps with the considerable resources of DWP, which has the largest staff quota of any Department and a very able group of civil servants, it would be possible to carry out an impact assessment on a rapid turnaround, given the scale of what we are talking about and, indeed, the problems of the sector as a whole.
On the ongoing consultation and the possibility of reviews in this area, will the Minister agree to meet me and the not-for-profit providers to explore the particular issues affecting them?
Guy Opperman
I will, of course, agree to meet them. I already meet NEST and the People’s Pension regularly, and they have made a very good pitch for a reduced levy. It is already a reduced levy, as I am sure the hon. Gentleman is aware, and there is already a 0.75% cap, but of course I am looking forward to meeting them as part of the ongoing consultation.
Matt Rodda
I am very grateful to the Minister and put on the record my thanks to him for offering that meeting. I look forward to seeing him and discussing the matter.
On amendment 5, the Minister mentioned the regulations in the Pension Schemes Act 2021, but will he write to me to discuss some of the ways in which the specific parts of the regulations relate to this issue? He has been reported in the media as suggesting that it might be wise to consider pension scams in the online harms Bill. Perhaps he will comment on that now or write to me separately, because we would like to work constructively with the Government on this matter. I appreciate that online harms are a huge and wide-ranging issue, and I have a constituency interest in violent crime in respect of a tragic incident in Reading.
Guy Opperman
I would be happy to write to the hon. Gentleman. He can read in detail what I said in The Times on both occasions, and that is pretty much all I can say on that matter.
Matt Rodda
I thank the Minister for his candour and for offering me a cutting from The Times, which is a fine newspaper.
Finally, on the PPF annual report, the issue is that while these documents are very worthy, and we should all read them, there is a delay. I urge the Minister to consider the need to reassure organisations in the sector, pension savers and pensioners themselves in the near term, rather than our having to wait well into 2022 before the 2021 annual report is available.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 2 ordered to stand part of the Bill.
Clause 3 ordered to stand part of the Bill.
Bill to be reported, without amendment.
Committee rose.
Written evidence reported to the House
COMPB 01 Nigel Simmonds
COMPB 02 Paul and Susan Warren
COMPB 03 Mary Young
COMPB 04 Transparency Task Force (supplementary)
COMPB 05 Financial Services Compensation Scheme (supplementary)
Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill
Wednesday 22nd September 2021
(3 years, 3 months ago)
Commons ChamberRead Full debate Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 22 September 2021 - (22 Sep 2021)
14:47 - The House divided: - Ayes: 52 / Noes: 292 - Question accordingly negatived.
Peter Grant (Glenrothes) (SNP)
I beg to move amendment 1, page 1, line 18, at end insert—
“(5) Within six months of this Act coming into force, the Secretary of State must lay before Parliament a report that assesses the impact of the payment of compensation to the customers of London Capital & Finance plc under this section, and in the light of that assessment, sets out the following—
(a) an assessment of the regulatory failures that gave rise to the need to compensate the customers of London Capital & Finance plc;
(b) measures the Government is taking to prevent such regulatory failures in the future;
(c) the reasons why the Government is providing compensation to the customers of London Capital & Finance plc but not the customers of other failed investment firms;
(d) criteria for when the Government should be expected to provide compensation following the collapse of investment firms; and
(e) the reasons for the capping of compensation payments under this section at 80% of what customers of London Capital & Finance would have been entitled to under the Financial Services Compensation Scheme.”
This amendment would require the Secretary of State to lay a report before Parliament that assesses the impact of the Government compensating the customers of London Capital & Finance plc, as well as broader issues relevant to the mis-selling scandal.
It is a pleasure to open this afternoon’s debate and to speak in favour of amendment 1, which is in my name. My amendment would require the Secretary of State to report back to Parliament within six months of the Bill coming into force, with an assessment of the impact of the payment of compensation to customers of LCF. Crucially, it would require the Secretary of State in that report to give an assessment of: the regulatory failures that made the London Capital & Finance compensation scheme necessary; the measures that the Government are taking to prevent such regulatory failures; the reasons why victims of other failed investment schemes, of which there are many, are not being compensated; the criteria for when the Government should be expected to provide compensation following the collapse of investment firms; and, finally, the reasons for the capping of compensation payments under this scheme at 80% of what customers of London Capital & Finance would have been entitled to under the Financial Services Compensation Scheme.
Kevin Hollinrake (Thirsk and Malton) (Con)
The hon. Gentleman is making some good points and has been very vocal in this Chamber to draw attention to the bonds of a similar nature that were also mis-sold. However is not subsection (5)(a) of his amendment, which would require,
“an assessment of the regulatory failures”
already covered by the Gloster report? Is not that exactly what that does? Has the purpose of his amendment not already been achieved through that in-depth and welcome report?
Peter Grant
It may well have been achieved by the Government’s response to the report, but the Gloster report achieved nothing; it only achieves change if the Government accept its recommendations. An amendment that was not pushed to a vote at an earlier stage of proceedings would have required the Government to give regular reports back to Parliament as to what they are doing with the Gloster report. Regardless of whether that amendment had been carried, I would hope that the Government will still do that.
The Government’s explanation for not even considering similar schemes for other mis-selling is that the exact details of London Capital & Finance’s mis-selling were unique and that none of the other mini bond scams were identical in every way. That is probably true because no two investment scams are identical in every way. The crooks will always find a slightly different way to get more money out of the victims, or to avoid whatever detection and prevention schemes are being developed, but the differences between the two companies are tiny compared to the similarities.
Gareth Thomas (Harrow West) (Lab/Co-op)
I want to take the hon. Gentleman back to the point made by the hon. Member for Thirsk and Malton (Kevin Hollinrake). Is not the problem the fact that we are being asked by the Government to believe that, as a result of the Gloster report, the FCA has fundamentally changed and that there is not going to be a problem ever again with how the FCA regulates? Is there not a need for another body to keep oversight of the quality of financial regulation, and perhaps in particular over whether the FCA continues to do its job properly in the future?
Peter Grant
The hon. Gentleman makes a valid point, which is well worth consideration. I do not want to go into the detail of how we should fix what is wrong with the Financial Conduct Authority just now. The first thing that we have to do is recognise that it ain’t working, and regardless of what promises and assurances we have had, it still is not working. Whether that is best dealt with by putting yet another monitor on top of the regulator to monitor it, I do not know, but there has to be recognition that the existing scheme of regulation, as it is carried out by the Financial Conduct Authority, is simply not fit for purpose. The same applies to the parts of the regulatory environment that fall under other Government Departments. It is not only Treasury Ministers who have such responsibilities.
Let me return to the similarities between London Capital & Finance and Blackmore Bond. They both misled their victims into believing that their activities were regulated by the Financial Conduct Authority. The only difference was that London Capital & Finance had a registration for something else, which it hid behind. Blackmore Bond did not have a registration of its own, but it hid behind the registration of other companies, which knowingly allowed their names to be associated with the marketing and selling of its products. The intention in both cases was the same, and that was to mislead—effectively, to con the customers. The results were the same: thousands of people lost everything. I do not understand why there is such resistance in the Government to saying that the remedy should be the same, or even to consider that the remedy should be the same.
In the immediate aftermath of the collapse of London Capital & Finance, the Financial Conduct Authority took steps to outlaw the marketing of mini bonds to retail investors. It outlawed the very practice that was at the cornerstone of London Capital & Finance’s business plan, as it was for Blackmore Bond and many others. There is still no explanation as to why, when the FCA was able to act so swiftly and decisively to close the door after the horses had gone, it took no effective action to stop those mis-sales years earlier, after it had been given credible and persuasive evidence of exactly what was happening in the mini bond market.
In earlier stages, I have raised concerns that there were other Blackmore Bonds just waiting to come to our attention. There were probably other mini bond-based businesses about to collapse. There were probably other investors about to face the awful reality that they had lost everything. That might be happening even as we discuss this Bill.
Last week, none other than Private Eye magazine reported that another mini bond company, Moregreen Capital Ltd, had written to its investors asking them to forgo their next interest payment. That might be the starting signs of severe trouble. I cannot confirm anything that was in the Private Eye article, and I cannot confirm very much from the public domain about Moregreen Capital Ltd in the way that I could for Blackmore Bond, for the simple reason that Moregreen Capital has failed to file its accounts for the last two years. Its only published accounts were so early in its trading history that today they are almost certainly useless. I should also make it clear, as is often the case, that company names can be similar and that that Moregreen Capital Ltd is unrelated to some other companies with Moregreen in their name. There might well be perfectly valid reasons for the action that Moregreen Capital has taken recently. There could be good reasons why it stopped publishing its accounts, or there might be yet another group of investors who are in the first stage of a journey that sees them lose everything with, as things stand, no prospect of compensation. The best-case scenario for Moregreen Capital’s investors is that they have nothing to worry about—that their investments are safe and that they will eventually get all the funds they were promised. But even if the best-case scenario pans out with Moregreen Capital, it will only be a matter of time before the next mini bond scandal rears its ugly head. Action has been taken to prevent that precise form of financial scam being allowed again, but we need action to anticipate and predict what scams will arise in future and to prevent them before they are allowed to take place. We have to recognise that thousands of people are victims of crime. They were the victims of criminal activity and they should be compensated in the same way as other victims of criminal activity have been compensated.
The amendment does not require the Government to establish an additional scheme, but it does require them to get this debate started. We in this Parliament are ultimately responsible for the regulatory framework in these islands. We collectively, and our predecessors, are ultimately responsible for having to set in place and to enforce a regulatory environment that would have protected our constituents from losing everything.
One of the examples I cited earlier was a retired military person who told Blackmore Bond’s directors, “This is my military pension—I can’t afford to lose it.” They took it and they lost it. That person deserves compensation. They have no chance of getting compensation out of Blackmore Bond. They are not covered by the financial services compensation scheme. Surely the Government have to agree that there is a case to be looked at in such examples. We have to look at a wider compensation scheme, in the same way we have for people who lose their holiday because their travel agent goes bust. Losing a holiday, which has happened to a lot of people over the past couple of years, is not a nice thing to happen—it is a distressing thing to happen—but when people lose their holiday, at worst they lose money they could afford to spend on a holiday; when people lose their pension they are losing their livelihood for the rest of their life. There has to be better provision for compensation for those who, through no fault of their own, see their pension, their plan for retirement and the future of their family’s financial security wiped out by charlatans who right now are taking advantage of a regulatory environment that is open to abuse.
Rehman Chishti (Gillingham and Rainham) (Con)
On the allocation of compensation to different individuals, all victims are victims of this scam, but is the hon. Gentleman saying that priority should be given to those who have suffered the most when it comes to how the Government move forward in the allocation of compensation for their losses?
Peter Grant
We have to remember that we are dealing with a large number of people. It is not just one company with 50 or 60 people who are victims; there are thousands of victims that we know of and probably many more than we do not know of, and the amounts of money that they have lost individually are life-changing for them. Someone who has worked for 20 years on a Member of Parliament’s salary probably has £20,000 or £30,000 they can afford to lose; these people did not. The amounts they have lost individually are significant; the amount that has been stolen collectively, as I said, is almost certainly over £1 billion. If people stole £1 billion out of a bank vault, law enforcement would not stop until every last one of them was behind bars for a very long time, and would, if need be, change the rules to make sure that it could not happen again. We should regard the theft of £1 billion out of people’s pension funds just as seriously as the theft of £1 billion of gold bullion out of the back of a Securicor van. All this amendment asks is that the Government recognise that as an issue and start to put answers in place as to how they can protect our constituents from falling victim to these scams in future.
Kevin Hollinrake
It is a pleasure to have the opportunity to debate these issues. The amendment tabled by the hon. Member for Glenrothes (Peter Grant) is interesting. Certainly I very much support the broad principle of greater scrutiny of the FCA, but I cannot support his amendment because I do not feel that it is effective, not least regarding the issues I raised earlier. Some of the issues in it have already been addressed. The regulatory failures were clearly identified in the excellent Gloster report. The report also—this was welcome—named individuals in the FCA who had failed and who tried to have their names redacted from it and exempted from any specific criticism. One of the cultural issues with the FCA is the lack of individual accountability either in the organisation itself or the organisations they regulate.
In subsection (5)(e) the hon. Gentleman talks about why we are compensating only 80% of the losses of individuals who lost money in London Capital & Finance. That speaks to a broad principle. Many of the investments people make have to be subject to the principle of caveat emptor. Especially with a relatively high-risk investment, it is incumbent on any investor to look at it and judge the risk for themselves. Some form of protection from the regulator is also required, but the regulator cannot be all things to all people and cannot be in all places at once. I had a constituent come to me who had lost a significant amount of money in London Capital & Finance investments, and they were quite clear that they understood that as they were getting an 8% return, whereas in a bank they would probably get 0.5% maximum in interest, there was a risk involved in such investment. It is quite obvious to most people that that is the case, whether they are sophisticated or unsophisticated investors. The broad principle of an investor having to look at the investment and judge for themselves is very important.
Sammy Wilson (East Antrim) (DUP)
I accept the point that the hon. Gentleman is making, but does he also accept that many small investors were actually misled—the Gloster report shows this—by the advice they were given by people in the FCA who indicated that the company was covered by the FCA and therefore they were guaranteed to get £5,000 if the firm went bust? That information was wrong, so some people made an informed investment decision on the wrong information supplied by the regulatory agency.
Kevin Hollinrake
Anybody reading the report will be appalled by the regulator’s performance in this case, given not just the number of complaints about LCF but the lack of joined-up thinking within the FCA. This was some years down the line; it happened after Andrew Bailey had taken over at the FCA. He knew there were problems right at the start, but there was no joining of the dots and there were the clear allegations of inappropriate conduct within LCF. The independent financial adviser who drew attention to it was a very competent person; he was not simply raising the issue saying, “I don’t like this company.”
The IFA was called Neil Liversidge. He wrote to the FCA setting out exactly what was going wrong with the designation of unsophisticated investors as sophisticated, the encouragement to class themselves as sophisticated, and where some of the investments were going. It was pretty clear what the problem was at LCF, and the FCA failed to act. That is simply unacceptable. That is why I welcome the compensation. However, it still has to be down to investors to make an educated decision. Certainly my constituent and others I have seen could see that this was not a Government gilt they were investing in; there were obviously some risks attached.
Rehman Chishti
My hon. Friend says that he welcomes the compensation that is being made. Of course, so do I and so does everybody else here, but linked to the question of compensation is justice and the delay in bringing the perpetrators to account through the investigation by the Serious Fraud Office. I would be grateful if the Minister or my hon. Friend could say why there is such a delay in to bringing those perpetrators to account, because people want compensation but they also want justice and to have the perpetrators brought to account.
Kevin Hollinrake
I could not agree more. The UK has a pretty poor record in terms of bringing forward fraud prosecutions. There are a number of things we need to do that are not really within the scope of this Bill. Not the least of them —the Government are committed to this—is bringing forward an offence of a failure to prevent an economic crime. That would make it far easier for the SFO to bring forward prosecutions. I would welcome my hon. Friend’s joining my campaign to bring that legislation forward, because it would make a huge difference to the SFO’s ability to bring forward speedy prosecutions.
Rehman Chishti
I am very happy to support my hon. Friend’s campaign to ensure that justice is done in this case.
Kevin Hollinrake
That is very welcome.
The key point in the amendment is about oversight. I am concerned that the FCA is not as accountable as it could be to this House. With repatriation, a number of regulations and regulatory oversight of the FCA have now passed back to us domestically whereas before there was accountability through the EU institutions. I am concerned that we have proper oversight of what the FCA does. The hon. Member for Glenrothes and the hon. Member for Harrow West (Gareth Thomas) are quite right: the jury is still out on the FCA. It has made some bold claims that it is reforming and becoming more effective. I welcome the fact that only a couple of weeks ago it set out some clear targets for a reduction in the number of investors investing in high-risk investment and being subject to scams. There are some specific criteria that the House can now hold it to account for; I am just not clear how we do so. I can see how the Treasury does so, but it is important that the House can, too.
In the work that I have done on the all-party parliamentary group on fair business banking, we have seen numerous cases in which the FCA has not been proactive or used the mechanisms at its disposal to sanction the people responsible. That is simply unacceptable. The FCA must be a much more proactive organisation and, for it to be held account for such proactivity, we need a clear line of responsibility between it and the House and its Members. The amendment is a good attempt, but not one that I can support.
Gareth Thomas
I am sympathetic to the broad thrust of the amendment tabled by the hon. Member for Glenrothes (Peter Grant) and his concern, which I alluded to in my intervention, that the Government, and certainly the FCA, appear to be saying, “Don’t worry—we’ve had a change of leadership and everything is going to be all right now. You don’t need to worry about the quality of the regulation of investment firms going forward, or the implementation and enforcement of consumer financial regulation, whether in this case or more generally.” I have some sympathy with the point of the hon. Member for Thirsk and Malton (Kevin Hollinrake) that we should be sceptical about such a claim. It is good that Treasury Ministers will be having a more regular dialogue with the FCA, partly as a result of this scandal.
As the House knows, I have taken a particular interest in the demutualisation of Liverpool Victoria. That is very different from the case of LCF, so it would not be appropriate for me to go into the particular details, but there are parallels in the treatment of Liverpool Victoria consumers and those of LCF products. Some of those parallels relate to the culture that appears to exist within the FCA. The all-party parliamentary group for mutuals received a letter from the FCA and one from the PRA, and they reveal that there have been almost 60 meetings between the regulators and the board of Liverpool Victoria, but not one meeting with its consumer-owners on its demutualisation. I wonder whether there is not a frog in hot water-type problem here, with the FCA so close to the Liverpool Victoria board in this case—and potentially to other financial firms—that it fails, perhaps accidently, to do its job on behalf of consumers with sufficient robustness.
I welcome the Dame Elizabeth Gloster report, which was excoriating in its findings. To pick out some key concerns, it said that there were “unclear” policy documents for use by FCA staff, a
“flawed approach to the Perimeter”
and a “failure to consider” the behaviour of particular businesses holistically. It also said that there was insufficient training of staff and pointed to confusion between Her Majesty’s Revenue and Customs and the FCA—our regulators—over the handling of particular issues.
I appreciate that the FCA has not only had a change of personnel but brought forward proposals for a consumer duty to try to rebuild some confidence. However, my problem with the duty, which it consulted on until the end of July, is that there is no sense of understanding the difference between consumers who also own a business—a mutual in this case—and consumers per se, or a willingness to take additional actions for consumers who are also owners. I worry about whether that additional duty will be robust enough.
Rehman Chishti
I really appreciate all the work that the hon. Gentleman has done on this matter. On the consumer duty, my concern, raised with me by local residents, is that the company was allowed to continue trading without investigation in 2015 after warnings of malpractice and maladministration. With his expertise and experience, does he think that, whether through the consumer duty or further regulation following the Gloster inquiry, the measures proposed would prevent what happened in 2015?
Gareth Thomas
The hon. Member invests an awful lot of confidence in me to predict what might happen, but I can well understand a Conservative looking to the Labour party for such guidance. I certainly hope that the consumer duty and better enforcement will help to prevent such a terrible debacle from happening again, because, as the House has rightly noted, many good people have lost an awful lot of money and deserve the compensation that the Bill will provide. However, many others who have been victims of similar cases would have also merited better protection from the FCA.
I will ponder aloud, in response to the Minister having some sympathy with the points made by the hon. Member for Glenrothes and my right hon. Friend the Member for Wolverhampton South East (Mr McFadden) in Committee, whether there is a need for a smaller body that does not just concentrate on the FCA but looks at some of the strategic issues around consumer protection and financial products in particular, and has a small number of inquiries each year looking at the performance of regulators in that regard, in part to help prevent a repeat of the LCF debacle.
As a model for such a body—I do not suggest it is perfect—I put on the Floor of the House, so to speak, the Independent Commission for Aid Impact, which the House uses to consider how our international aid money is being spent and the strategic challenges in that. It is a small, dedicated body that operates in a completely different sphere from this, but it produces important and useful reports that are used by the relevant Department, experts in the sector and, crucially, the International Development Committee. I wonder whether such a body would be appropriate to keep the PRA and FCA’s feet to the fire. It could be used by the Treasury Committee, and indeed other Committees of the House, to assess the quality of consumer financial regulation and the job that the FCA, PRA and other regulators are doing to protect consumers from any repeat of the LCF debacle.
Rehman Chishti
The hon. Gentleman’s idea of an independent committee should be considered among the wider tools to get the right support for consumers. Of course, I have admiration for him because, being a fair man, I see he also went to the University of Wales Aberystwyth, and we were taught at university always to respect other colleagues’ talents. That is why I respect his expertise on this matter.
Gareth Thomas
I am not sure I need to respond other than to thank the hon. Member for his intervention.
Kevin Hollinrake
I am sure that many other people in the House often get frustrated, as I do, at unaccountable independent bodies or arm’s length bodies, and I might mention not least the FCA, possibly the Environment Agency and perhaps the NHS as well. Would it not be better for the FCA to have a direct line of accountability to those who are elected by the people of this country and for the body the hon. Member recommends to be made up of parliamentarians from either House?
Gareth Thomas
The hon. Member may be right. I simply put out the idea at this stage, and I hope Ministers will be sympathetic to it, that we should not just accept the sense that, following Dame Elizabeth Gloster’s report, the payment of compensation and the introduction by the FCA of this new consumer duty, everything is suddenly all right in the world of consumer financial regulation. Perhaps Ministers on the Treasury Bench are inadvertently suggesting that. I think another step needs to be taken to hold the feet of regulators to the fire.
I will briefly raise two other concerns about financial regulation and some of the lessons that need to be taken from the LCF debacle, which the amendment from the hon. Member for Glenrothes helpfully gives me the opportunity to raise. The first is the idea that all the information available to the boards and the management of companies that has to be shared with the FCA and the PRA from time to time should be regarded as commercially sensitive. Clearly, there is genuinely commercially sensitive information that it is right for companies and businesses to keep for themselves. However, I fear—certainly in the case of Liverpool Victoria, which I have been looking at—that the excuse that information is financially sensitive is being used to deny consumers’ legitimate rights to know what the future holds for the business in which they have invested their savings or money. I gently suggest that that topic is worthy of a review in itself, potentially with changes to regulatory practice and, if need be, to legislation.
Lastly, the existence in legislation at the moment of provisions for so-called independent experts to look at the decisions that boards are taking in the context of demutualisations are a recipe for regulatory failure. In the case of Liverpool Victoria, independent experts are being appointed by the board, paid by the board and briefed by the board. Obviously, it is fairly easy to predict what the outcome of the independent experts’ work is going to be: to recommend largely what the board wants to happen. That is another issue that needs to be looked at.
I put those points on the record to suggest that Ministers should not be complacent about the quality of the FCA’s performance. There needs to be a bit more of a robust challenge and a look again at how financial regulation works.
Mr Pat McFadden (Wolverhampton South East) (Lab)
I want to use the opportunity provided by the amendment to raise a few points, particularly about clause 1, and to put them to the Minister. I thank Dame Elizabeth Gloster and both the Treasury Committee and the Work and Pensions Committee for the work they have done on this issue.
The issues covered by the Bill have been widely set out in debates on Second Reading and in Committee. They include: the wholly deficient practices at the FCA that meant that hundreds of reports of harm were not acted on, which was described by Dame Elizabeth Gloster as an “egregious” failure of the FCA to fulfil its statutory duties; the fact that this failure allowed LCF to continue in operation for years longer than it might otherwise have, thereby multiplying the harm to investors; the reassurance at one point from the FCA that what was happening was not a scam; the impact of the halo effect in having a regulated firm selling unregulated products, leading unsuspecting investors to believe that these products were far safer than they actually were; the loss of a whistleblower’s letter three years before the firm’s collapse, and the damning conclusion from Dame Elizabeth Gloster that the loss of that letter probably did not make any difference, because the FCA was so dysfunctional that, even if it had not been lost, it would not have been acted on; the repeated failure to join the dots and the treating of each LCF transgression—for example, on its use of financial promotions—as an isolated incident, when instead it was a pattern of behaviour designed to use its regulated status to bolster confidence in unregulated products; and the public disagreement between Dame Elizabeth and the Governor of the Bank of England about the issues of responsibility and personal culpability.
I served on the Parliamentary Commission on Banking Standards, which said that
“a buck that does not stop with an individual stops nowhere.”
That quote has been much used in the debate about this issue, which has raised sharply the limitations of collective accountability and the question of whether in this case the buck really stopped with anyone. Of course, most importantly of all, there is the issue of the distress and the financial loss to investors and the question of how they should be compensated. All of this has led to the Government stepping in with this Bill to authorise compensation up to a certain level for investors.
Based on the amendment, I want to put a number of questions to the Minister arising from the Bill. First, why has compensation been set at 80% of the Financial Services Compensation Scheme maximum of £86,000, not the full level? That is probably the main outstanding concern of LCF investors, who are grateful that compensation will come but who cannot understand the 80% cap given the manifest failures set out in Dame Elizabeth’s report. Are the Government completely fixed on this 80% figure, or is there any prospect of that being reconsidered?
Rehman Chishti
I thank the shadow Minister for giving way, and I will of course raise the same point with the Minister in due course. The right hon. Gentleman says that the victims will of course welcome the compensation coming their way, but the point raised with me by those who have suffered a loss is whether the Government can look to prioritise those who have suffered the most due to their loss. There has been a lot of data gathering by the FSCS, the FCA and the Serious Fraud Office, so that should be easily apparent. What is his view about ensuring that compensation is quickly given out and prioritised to those who have suffered the most?
Mr McFadden
The hon. Member raises a very fair point. It has already been referenced in the debate that this is not just about amounts, but about the timescale, and we all want the Government and whoever is administering this scheme to be able to get on with it.
Sammy Wilson
I understand the point, but does the right hon. Gentleman accept that defining those who have suffered the most could be quite difficult? Are those who have suffered the most those who have lost the most, or perhaps those who are not all that well-off and have found that they had lost all of their savings, even though all of their savings would not have been the same as the loss of some of the bigger investors? Does he accept that that is a difficult definition?
Mr McFadden
The right hon. Member raises a very fair point. If we pluck a sum of money out of the air, it could be a lot of money to one person and perhaps less to somebody else, depending on their wealth.
Let me return to the questions for the Minister arising from the amendment and the Bill. The second is the important question of where the decision to compensate the LCF investors leaves investors in other firms where regulatory failure is alleged. Where has the bar now been set for future compensation in the event of regulatory failure? The taxpayer cannot stand behind every investment loss. Some investors will make money and some will lose. That is in the nature of a market economy. However, the question of compensation arises when there is a clear regulatory failure, because that is considered to be a different matter. Having come up with this scheme, where do the Government now draw the line?
How can we be sure this will not happen again? There are two aspects to this question. The first is the role of the regulator. The FCA is going through a transformation programme designed to ensure that changes are made to prevent a similar thing from happening in the future.
Peter Grant
There is clearly a need to specify which kinds of investment losses might be compensated, and which ones will not be. Given that the Financial Conduct Authority has outlawed the targeting of mini-bonds at retail investors, is that a clear indication that something was fundamentally flawed with all selling of those bonds, whether it was done by LCF, Blackmore Bond, or anybody else?
Mr McFadden
The hon. Gentleman makes a fair point. On how we can be sure that this will not happen again, and the transformation programme, it is to be expected that companies would go through such a programme, given the damning nature of Dame Elizabeth’s findings. There is also, however—and this is not just about this specific case—understandable public scepticism when a scandal happens, people talk about lessons being learned, there are some changes to management, and the organisation moves on. How do we ensure that, while understandable, such public scepticism is not justified in this case because something different is happening, and that we will not end up back here, some time in the future, debating another investment scam that was not spotted and acted on in time?
The second aspect to the question of how we can ensure that this does not happen again relates to legislative protections. This scam was promoted by a lot of online advertising. The online safety Bill is coming up, and at the moment paid-for advertising is excluded from that. Why should that be the case? Surely the LCF case shows that paid-for advertising must be included. As the Minister will be aware, there is a growing coalition behind the argument that the online safety Bill must offer greater protection against financial scams and fraud, and that is bound to be a major issue as the Bill goes through the House.
That issue is important, because consumers are being targeted every day with adverts, text messages, emails, and phone calls geared either to obtaining their financial details, or promising get-rich-quick schemes. As covid has pushed more of our lives online, it is imperative that legislation keeps pace with the increased use of online scams that are designed to strip people of their money. It is becoming more and more difficult for consumers to ascertain the difference between a genuine approach and a scam approach. We in this House have a legislative duty to keep pace with what organised criminals are trying to do.
Mr McFadden
I am coming to the end of my remarks; I hope the hon. Gentleman does not mind. I leave the Minister with this: is it not better to try to stop people being ripped off in the first place, than to have to ask the taxpayer or, as in clause 2, members of pension schemes, to compensate people after such scams have already happened? I will leave it there, although I will later have a few remarks and questions about clause 2.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
It is an honour and privilege to respond at Report of this important Bill, which deals with the compensation due to many of our constituents up and down the country. I pass on apologies from the Economic Secretary to the Treasury who is on a ministerial trip to the United States on behalf of Her Majesty’s Government.
As the House will be aware, Dame Elizabeth Gloster’s report has already been taken through. It is a detailed report that deals with the regulatory failures that led to the collapse of LCF. The Government have accepted all four of the Gloster recommendations, and the FCA has committed to implementing all nine of the recommendations that were addressed to it, and to report publicly on the progress of those vital reforms.
Progress has already been made in implementing those recommendations. For example, the Treasury has consulted on proposals to regulate so-called non-transferable debt securities. In respect of regular reporting, hon. Members should be aware that the FCA report on the transformation programme takes place every six months. Its last report took place in July 2021, and the next report will be in spring next year.
Colleagues have raised a number of different matters, and I will attempt briefly to deal with them. The hon. Member for Harrow West (Gareth Thomas) recommended to Treasury colleagues that parliamentarians should hold the FCA to account directly, and I am sure my Treasury colleagues will respond to that proposal by letter. My hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) made some comments, and it is right that the FCA needs to be more proactive. To be fair, its new chief executive, with whom I know my hon. Friend is familiar, is being more proactive, and there is proper oversight on an ongoing basis. Several colleagues mentioned the online harms Bill. I have engaged with and met Google, Facebook, LinkedIn, and Instagram, as have colleagues from other parts of Government. Those individual companies need to step up to the plate, because it is very much in their domain to make real change.
Rehman Chishti
I am grateful to the Minister for allowing me briefly to intervene. He said he has had conversations with those social media companies. I sat on the Home Affairs Committee when we discussed online harms. What was the response of those social media companies, and what will it take to get them to do the right thing?
Guy Opperman
It will take strong pressure by fantastically good constituency MPs such as my hon. Friend, and others, so that those companies realise that they have an obligation to do the right thing in respect of the many constituents we represent. Clearly, though, these are matters to be considered by the Government, and I am sure my hon. Friend will be making representations to the Secretary of State for Digital, Culture, Media and Sport.
Let me turn briefly to the amendment. A lot of the speeches made had nothing to do with the amendment, and it is important to avoid creating the misconception that the Government will stand behind all bad investments in the future, where FSCS protection does not apply. The Government will establish a scheme based on the level of FSCS compensation, capped at £85,000. We have carefully considered the issues and are satisfied that the individual circumstances surrounding LCF are completely unique. Other mini-bond firms have failed, but LCF is the only mini-bond firm that was authorised by the FCA and sold bonds in order to on-lend to other companies. As the House will know, only three Government compensation schemes have been established in the past three decades, for Barlow Clowes, Equitable Life, and now LCF, despite many firms failing over that period. This type of intervention is the exception, not the rule.
Although the amendment is legitimate and considered to be principled and practical, there is a practical reality that the FCA is already reporting and is held to account by the Treasury. With respect, I therefore ask the hon. Member for Glenrothes (Peter Grant) to withdraw his amendment.
Question put, That the amendment be made,
Mr McFadden
We have just had a short debate on an amendment that was largely focused on clause 1. Before we finish the Commons stages, I want to put a few questions to the Minister, mainly relating to clause 2 and pensions.
We discussed some of these issues in Committee. Clause 2 imposes a levy on the pension schemes to pay for the consequences of the Dalriada case, which means that the pension fund compensation scheme has to raise what Ministers expect to be around £300 million. I have a few questions about that.
My first question is about the flat-rate way of raising such levies. It leaves schemes with large numbers of members, many of whom have small pension pots—for example, those on auto-enrolment schemes—paying a significant proportion of the levy, even though they are run in a completely honest way that has never been near any kind of pension fraud. Have the Government considered a more proportionate way of raising such levies, to protect pension scheme members with very small pots?
My second question is about the relationship between the greater pension freedoms in recent years and the risks of scams and financial fraud. The advent of these freedoms has resulted in a number of examples where unsuspecting pensioners have been persuaded to transfer their pensions in ways that were not in their interests or, even worse, that led to fraud and a loss of their hard-earned savings. The Select Committee on Work and Pensions has shown significant interest in the issue, and it has received estimates from the Pension Scams Industry Group that 40,000 people may have lost up to £10 billion since the pension freedoms were introduced in 2015.
Thirdly, great fanfare was made of advice and guidance when the pension freedoms legislation was introduced, but take-up has been very low, and efforts by the Department to improve it have not radically changed the proportion of people accessing good advice. Without good advice, pension scheme members are left much more vulnerable to unscrupulous sales pitches or, alternatively, bad decisions that are clearly not in their interests but may be in the interests of the financial adviser advising them. What are the Minister and his colleagues doing to change the situation with regard to pensions advice?
Finally, those accessing their pensions under the age of 55 are subject to a hefty tax charge, but sometimes people are persuaded to do this because they are advised that there is no tax charge and they will not have to pay any tax. They then find themselves not just victims of a scam but pursued by Her Majesty’s Revenue and Customs. What can the Minister do to persuade HMRC to take account of the difference between someone acting on false information and someone knowing that they will incur a tax charge? I would be grateful if the Minister could address those questions before we finish.
In my last contribution to the debates on this Bill, I want to thank the Minister and his colleague the Economic Secretary to the Treasury for their consideration of the points that have been raised throughout by hon. Members. I also thank the Clerks and the Bill team for their responses to inquiries. We will support the Bill because we want this compensation to be paid out, but I hope that the Minister will consider some of the questions we have raised about the nature of scams and the need to do more to protect consumers. Although this Bill will go through tonight, I have no doubt that consumer protection, frauds, scams and the amount of things happening online will be raised again when we debate the Online Safety Bill in the weeks and months to come.
Kevin Hollinrake
The Treasury deserves great credit for introducing this compensation scheme in the first place. It is a pity that the Minister responsible—my hon. Friend the Economic Secretary—is not on duty today, because he deserves personal credit for that, but the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Hexham (Guy Opperman) is an excellent stand-in.
Warren Buffett once said that what we learn from history is that we do not learn from history. The key lesson that we have to learn from this sorry episode—a damning assessment of the Financial Conduct Authority’s capability as a regulator at the time—is the need for scrutiny of the regulator. As many Members know, I do quite a lot of work trying to hold banks to account in the all-party parliamentary group on fair business banking, but I still do not know how this place holds the regulator to account. I know that the Treasury has some direct influence, and the Treasury Committee can write reports and conduct inquiries, but I still do not know of a direct mechanism that can be used by this House to address regulation and regulations.
Now that we have repatriated the oversight function from the European Union, various different suggestions have been made as to how that might happen in this House. One of the most interesting proposals is for something along the lines of the Public Accounts Committee—a regulatory accounts committee, supported by a version of the National Audit Office, so that professionals would sit behind a parliamentary committee made up of elected parliamentarians. Whoever holds the regulator to account should be accountable to the public; they should not be an independent body of appointees. There must be a mechanism to make sure that the regulator does the right thing, makes good on its future commitments and ensures that episodes like this do not happen again.
The Gloster report, which led to the compensation scheme that we are putting in place today, made very damning criticisms of the then governor of the FCA, Andrew Bailey, who is now the Governor of the Bank of England. I have experience of dealing with the FCA and Andrew Bailey—I asked him four times whether he had followed the FCA’s own whistleblowing procedures when handling the case of Sally Masterton’s whistleblower complaint with HBOS Reading and Lloyds. He refused to answer that question, which I find horrendous. Both the FCA and the whistleblowing legislation were established by statute, yet we as parliamentarians cannot hold the regulator—which we put in place—to account. We need a better system of regulatory oversight.
Sally-Ann Hart (Hastings and Rye) (Con)
Residents in Hastings and Rye have been victims of London Capital & Finance. Does my hon. Friend agree that if people do something in good faith, get the right advice and the right system is in place, there should be measures in place to ensure that they do not end up on the back foot?
Kevin Hollinrake
As I said on Report, it is incumbent on investors to check out investments. If something is paying out 8% when they can get 0.5% from their bank, they must say, “Well, this is more risky than simply putting it in the bank.” We cannot lose sight of that principle. However, the least we can expect is a regulator that is proactive. In 2015, a number of people were raising concerns about LC&F, including an independent financial adviser who wrote in detail to the FCA to say what was happening at LC&F, but the FCA did nothing for four years, which is totally unacceptable. People deserve a higher standard of regulation.
On the Online Safety Bill, London Capital & Finance spent £20 million on Google advertising. It is clear that platforms are playing a role in this. This was not even seen as a scam. We can argue that it was a scam, but it was to some extent regulated by the FCA. UK Finance has released a report today saying that online scams are now a national security risk. We must take seriously its calls for more action to be taken. The Online Safety Bill must be the right place to legislate to require the platforms to at least establish whether the investment companies—the people who are advertising investments—are bona fide organisations, and not simply people impersonating them.
With that, I will conclude. I am keen to hear the Minister’s words in his summing up.
Peter Grant
The SNP will, as we indicated, support the Bill on Third Reading. I thank everyone who contributed to the debate today. There were a number of interesting contributions on my amendment. I understand why some people did not feel they could support it in its entirety, but I was very clear that across the House the intention behind the amendment has a considerable amount of support. I hope the Government will take that on board.
The second point that became clear during the debate is that the regulatory failures that allowed London Capital & Finance to happen were not restricted to the FCA. There were catastrophic failures in that organisation—that is now undeniable—but they were not the only failures. It was not only the FCA that let down investors in some of the other scam companies mentioned during consideration of the Bill. Companies House did not enforce the requirements to publish company information. It says it is not its job to verify that companies submit the names of directors, for example. If that is not the responsibility of Companies House, whose responsibility is it?
Nobody enforces the rules that require companies to publish their annual accounts and other critical information on time. Companies and directors can have literally dozens of yellow card suspensions against a company, but then they are lifted and nothing ever happens to them. Those requirements are essential if people with an interest in a company are to get an early warning that things are going wrong. If those requirements are not observed, companies can be sunk before anybody has a chance to do anything about it.
I appreciate that part of that issue is not within the remit of the Treasury, but I hope that what comes out of these proceedings is that colleagues on the Treasury Committee and the Business, Energy and Industrial Strategy Committee will have plenty of new material to work on. Clearly, this is a failing of such proportions and complexity it will take more than one piece of legislation to put it right. Ultimately, we are the regulators. Every time we say there has been a failure of regulation, what we are saying is that we, in this Parliament, have failed to protect our constituents properly, so there needs to be a degree of humility among all of us at the degree to which this Parliament and its machinery failed to predict, identify, prevent and remedy the scams that we have, sadly, spent so much time talking about over the past few months.
In supporting the Bill, I share the comments made towards the Treasury team. I have been very grateful for the positive way in which many of my comments have been taken by Ministers, which does not always happen with comments from Opposition Members. A big shout out to Salma and Scott in the SNP research team, who once again made me sound as if I knew what I was talking about, which is quite an achievement. A big thank you, also, to all those who gave evidence, either written or oral. Some were talking about things that had hurt them greatly. It was difficult for them to talk about that on the record. I hope the Bill has been made a bit better as a result of their contributions and I hope their contributions will have made sure that the issues raised, if they have not been dealt with in the Bill, will be dealt with by other legislation very soon.
James Grundy (Leigh) (Con)
I am pleased that the Government have offered compensation to investors who fell victim to the collapse of London Capital & Finance. Many are set to lose significant sums through no fault of their own, having invested in a Financial Conduct Authority approved company and followed advice from London Capital & Finance that the Government and Dame Gloster concluded was misleading. A number of my constituents fall into that category and they have asked that I speak for them today.
The Government have acknowledged that the situation regarding London Capital & Finance is unique and exceptional. As such, the Government stepped in to create a compensation package on a one-off basis. Bondholders invested in what they believed was a regulated and approved company, which of course it was, and the Government expect to pay out significant sums to those affected and eligible. I welcome that. The group of women I met in my constituency who are affected by this issue are not millionaires, and nor were they trying to make a quick buck by investing in risky, speculative finance. These are ordinary people who invested their hard-earned savings in what they believed to be a solid, officially approved and properly regulated product.
Bondholders have been badly let down by London Capital & Finance, but they have also been let down by the regulatory system that was designed to protect them. The independent investigation led by Dame Elizabeth Gloster, which the Government published at the end of last year, concluded that the Financial Conduct Authority did not discharge its functions in respect of London Capital & Finance in a manner which enabled it to effectively fulfil its statutory objectives during the relevant period. Due to the Financial Conduct Authority’s significant regulatory failure, there is a case to be made that the Government scheme ought to provide the same level of compensation as the Financial Services Compensation Scheme, namely 100% of loss capped at £85,000 instead of the current £68,000.
Finally, I would be grateful if my hon. Friend the Minister would write to me to clarify when the Treasury will release details of the timescale of the compensation process, so I can pass that on to my affected constituents. I hope the Government will give due consideration to the points I have raised in today’s debate.
Rehman Chishti
I echo the comments made by my hon. Friend the Member for Leigh (James Grundy) and it is a real pleasure to follow him on this issue. I thank the Minister and, through the Minister, the Treasury and all involved in the Government for what they have done on this matter. The point made by my hon. Friend and others today is this: there are individuals who have suffered due to no fault of their own. It is absolutely right that each and every one of us who has those constituents stands up and fights to ensure they receive fairness and justice. I thank the Government for doing the right thing by offering compensation in these circumstances. Again, I thank all hon. Members who have pushed for that. Members of Parliament often need to push the Government to do the right thing and I thank the Government for doing the right thing.
The question I have for the Minister—it links to the point made by the right hon. Member for East Antrim (Sammy Wilson)—relates to prioritising individuals who have suffered the most. His point is absolutely right: how do we determine who has suffered the most? Will the Minister ask the Treasury to clarify whether there is a way to determine who has suffered the most? It is only fair and proper to ensure that when money goes out, those who have suffered the most, taking all factors into account, get compensation at the earliest opportunity.
My second point, also made by my hon. Friend the Member for Leigh, is on timescale. When will the compensation start to go out? Will it be before or after Christmas? What is the full timescale for the compensation to go out? What people do not like is injustice or delayed justice. I speak as a former barrister who prosecuted and defended cases. I understand that serious and complex Serious Fraud Office cases take time, but there needs to be an explanation from the Government to people outside about what is causing the delay and when they will receive justice. We know a fraud has been committed. We know the Gloster report identified a wrongdoing. Can the Minister therefore seek a clarification from the Attorney General’s office on the timeline for prosecuting individuals?
My third point, raised by the shadow Minister, the right hon. Member for Wolverhampton South East (Mr McFadden), is on what action the Government will take with regards to false advertisements and online harms. When I was a member of the Home Affairs Committee, we had the same issue with regards to extremism and material going online. We asked Google, YouTube and all the other social platforms what action they were going to take. I am grateful to the Minister for saying that it is down to Members of Parliament like myself to push Google to do that, but we do not have the same clout as the Government—or the sanctions and levers available to the Government. If the new Secretary of State for Department for Digital, Culture, Media and Sport wants to look at platform verifications, that is something she may want to consider. I say to the Minister: will he please get the compensation out as quickly as possible and ensure that lessons are learned so that nothing like this ever happens again in our financial regulation of institutions?
Guy Opperman
I rise to respond to colleagues and wrap up the Bill, and I do so with great humility because this is a very serious matter. Many of our constituents up and down the country, regardless of politics, have had grievous losses. It is to the Government’s great credit that from the date of the Gloster report, we have managed to consider the report, draft and introduce legislation, consider it and progress it through the House. I am pleased to say that within six months of Royal Assent, payments will have been made. That is the assurance that the Treasury is willing to give; I most definitely support it, and I am quite sure that colleagues will hold it to account for that. It is very important that the matter is properly scrutinised.
I thank all Members, present or not, who have contributed to the Bill. Clause 1, as colleagues know, will ensure that there is parliamentary authority for the Government to pay compensation to London Capital & Finance bondholders who have not already received compensation from the Financial Services Compensation Scheme. The Government recognise that this has been a very difficult time for LCF bondholders; I hope that the compensation will offer some relief for the distress and hardship suffered and provide closure on a difficult matter.
The Government expect to pay about £120 million in compensation to approximately 8,800 bondholders in total. The Economic Secretary to the Treasury has confidence that all payments will be made within six months of Royal Assent; in the context of previous examples of the process under successive Governments, that is exceptionally fast.
This is also about justice. Having been a prosecutor for 20 years, done nine murder trials and prosecuted as an investigator for the Department of Trade and Industry, when it existed, I can assure the House that I take exceptionally seriously the principle that all people should be held to account within the due process of the law and that our constituents should feel that the due process of the law will be followed. On the comments made in respect of the Attorney General and the Treasury, I can only say that responses will be given to individual Members of Parliament.
Clause 2 will give the Secretary of State for Work and Pensions the power to provide a loan to the Pension Protection Fund for the fraud compensation fund. It will ensure that compensation reaches approximately 8,806 individuals on an ongoing basis. It follows the High Court decision in the case of Board of the Pension Protection Fund v. Dalriada Trustees Ltd on 6 November 2020. Again, we have worked very quickly—within a year—to bring consideration and legislation forward so that the fund will have the £350 million that it needs to ensure that pension claims are met. Without these measures, there would not be the capability to make this compensation; that is why we need to provide the loan to ensure that the fund can continue to make compensation for all eligible schemes on an ongoing basis.
I thank the many people who have contributed to the Bill, including the private office and policy teams at the Treasury and the Department for Work and Pensions. I also thank all Members who have engaged with the Bill. Individual Members of Parliament have made a massive difference; I pay particular tribute to my hon. Friend the Member for Leigh (James Grundy), who spoke very movingly about his amazing campaign on behalf of his constituents. He can be very proud of the way he has championed their cause, and so can my hon. Friends the Members for Gillingham and Rainham (Rehman Chishti) and for Thirsk and Malton (Kevin Hollinrake) and the hon. Member for Harrow West (Gareth Thomas).
My hon. Friend the Member for Thirsk and Malton cited Warren Buffett as the guide to all matters going forward. I would respond with Lao Tzu, who it is fair to say is not often heard in the House of Commons: the longest journey starts with the shortest step. I consider that the Government have made many steps to making proper compensation and bringing the right people some recompense for a total injustice. I commend the Bill to the House.
Question put and agreed to.
Bill accordingly read the Third time and passed.
Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill
Monday 11th October 2021
(3 years, 2 months ago)
Lords ChamberRead Full debate Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021 Read Hansard Text Amendment Paper: Consideration of Bill Amendments as at 22 September 2021 - (22 Sep 2021)
Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill
Tuesday 19th October 2021
(3 years, 2 months ago)
Lords ChamberRead Full debate Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021 Read Hansard Text Amendment Paper: Consideration of Bill Amendments as at 22 September 2021 - (22 Sep 2021)
Viscount Younger of Leckie (Con)
My Lords, in the UK there is a wide range of opportunities for people to invest and help make a better future for themselves and their families. The Government’s role is to ensure that the system of regulation is suitably robust, so that individuals are treated fairly and have confidence in the financial system that they entrust with their hard-earned savings. While our regulators are working hard to minimise harm to consumers and pensioners, unfortunately, no system of regulation can completely eradicate the risk that firms fail, or that some bad actors, intent on committing fraud, slip through the net.
This Bill relates to two areas where it is necessary for the Government to step in to ensure a fair outcome for London Capital & Finance investors and victims of pension liberation fraud. This two-measure and two-clause Bill will provide the necessary powers for these two separate groups to receive the compensation they deserve. The first clause relates to a new government scheme to compensate London Capital & Finance bondholders who lost money after the firm entered administration in 2019. The second clause seeks to provide the Secretary of State for Work and Pensions the power to make a loan to the board of the Pension Protection Fund. The purpose of that loan is so the existing fraud compensation fund, which the Pension Protection Fund administers, has the necessary funds to continue to provide compensation to eligible pension schemes.
This Bill, which garnered widespread support in the other place, demonstrates that the Government will take action and step in when necessary. There are some important issues at stake. One, on which I am sure there will be considerable debate this afternoon, is the competence of the regulator. There is also the question of when and how the Government should step in to provide compensation. I would like to touch briefly on each of these issues and to provide some context for each of the measures and how they are intended to operate.
The House will be aware that the Government have committed to establishing a compensation scheme for investors in the failed mini-bond firm, so-called London Capital & Finance, or LCF. LCF was an FCA-authorised firm that sold unregulated non-transferable debt securities, commonly known as mini-bonds, to investors. Some 11,600 bondholders, many of whom had invested a significant portion of their savings, lost around £237 million when LCF went into administration in early 2019.
Following the unprecedented scale of this collapse, the Economic Secretary directed the FCA to launch an independent investigation into the FCA’s regulation and supervision of LCF. Dame Elizabeth Gloster led the investigation, which concluded that the FCA did not effectively supervise and regulate LCF during the relevant period. Dame Elizabeth’s conclusions raise serious questions about the regulator’s approach to supervision and I would like to use my remarks later in this debate to provide some further detail on the plans they have in place to address her recommendations.
LCF’s business model was highly unusual both in its scale and structure. In particular, the firm was authorised by the FCA, despite generating no income from regulated activities. This allowed LCF’s unregulated activity of selling non-transferable debt securities, commonly known as mini-bonds, to benefit from the so-called halo effect of being issued by an authorised firm, helping LCF gain respectability among bondholders, many of whom were elderly.
In response to regulatory failings detailed in Dame Elizabeth’s report, and the range of interconnected factors that led to losses for bondholders, the Government announced that they would establish a compensation scheme. The scheme will be available to all LCF bondholders who have not already received compensation from the Financial Services Compensation Scheme. It will provide 80% of bondholders’ principal investment up to a limit of £68,000, which represents 80% of the compensation they would have received had they been eligible for FSCS protection. Where bondholders have received interest payments from LCF or distributions from the administrators, Smith & Williamson, these will be deducted from the amount of compensation payable.
The Government expect to pay out around £120 million in compensation to around 8,800 bondholders in total, and have committed to ensuring that the scheme has made all payments within six months of the Bill securing Royal Assent. However, it is important to emphasise that the circumstances surrounding LCF are unique and exceptional, and the Government cannot and should not be expected to stand behind every failed investment firm. This would create the wrong incentives for individuals and an unacceptable burden on the taxpayer. Ultimately, investors must choose investments that are suitable for their risk tolerance and invest in high-risk, high-reward schemes only if they are prepared to lose the sum that they invested.
Government stepping in to provide compensation in response to regulatory failure or maladministration is unusual, but not entirely without precedent. Noble Lords will recall that the Government provided compensation to investors in Barlow Clowes, an investment scheme that failed in the 1980s, and in respect of Equitable Life. Like the LCF scheme, compensation was based on a percentage of investors’ losses.
Turning to the specifics of the Bill, the LCF measure is contained in Clause 1 and includes two key elements. First, it provides parliamentary authority for the Treasury to incur expenditure in relation to the scheme. Secondly, it makes a minor technical change which disapplies the FCA’s rule-making processes for the purposes of the LCF compensation scheme. The Treasury intends to use Part 15A of the Financial Services and Markets Act to require the Financial Services Compensation Scheme to administer the scheme on the Treasury’s behalf.
By disapplying FCA rule-making requirements, existing rules pertaining to the FSCS can be applied to the scheme without the need for the FCA to undertake a lengthy public consultation and impact assessment. This reflects the fact that the Government are fully funding the scheme and so there is no need to directly consult with FCA levy payers. It also avoids any unnecessary delays to compensation payments that such consultation would inevitably entail.
As I set out, this is a two-measure Bill, the second clause of which concerns loans to the board of the Pension Protection Fund. Clause 2 will amend the Pensions Act 2004, inserting a new section, which will give the Secretary of State for Work and Pensions the power to lend money to the board of the Pension Protection Fund, which manages the Fraud Compensation Fund. Pension savings are the largest financial asset for many people across the United Kingdom, for which they will save over the course of their working lives to provide for themselves in their retirement. That is why the Fraud Compensation Fund was established: to provide a safety net and pay compensation to occupational pension schemes which have lost out financially due to dishonesty.
When the Pension Protection Fund was set up in 2004, pension liberation fraud did not exist. This fraud involves members being persuaded to transfer their pension savings from legitimate to fraudulent schemes, with promises of high investment returns or access to a lump sum or loan from their pension scheme before the age of 55 without incurring a tax charge. It was not and could not have been envisaged for such schemes to be in scope for the Fraud Compensation Fund when it was established. Therefore, clarity was needed as to whether these schemes were eligible to receive compensation through the fund.
On 6 November 2020, the High Court found these pension liberation schemes to be in scope for compensation through the Fraud Compensation Fund, subject to meeting eligibility criteria. Since then, the Government and the Pension Protection Fund have worked rapidly to ensure that all those who have been victims of pension liberation schemes—an expected 8,806 people—are able to be compensated through the Fraud Compensation Fund.
One victim of this fraud is one victim too many. I reassure your Lordships that the Government are fully committed to working with regulators, the industry and enforcement agencies to protect people from pension scams perpetuated through transfers from one pension scheme to another, and to making it as hard as possible for criminals to carry out their malevolent intentions. It is estimated that the pension liberation fraud claims will exceed £350 million, far greater than the approximately £43 million currently held in the Fraud Compensation Fund. Therefore, there is a need for the Fraud Compensation Fund to have access to additional funding, and this Bill provides exactly that.
This Bill is necessary and important. It will ensure financial protection and fair outcomes for victims of pension liberation fraud. It will also provide some relief and closure for London Capital & Finance bondholders. I commend this Bill to the House and beg to move.
Lord Davies of Brixton (Lab)
My Lords, I want to address the second part of the Bill, Clause 2, which allows the Secretary of State to
“lend money to the Board”
of the Pension Protection Fund. The background to this is that, in effect, the fund’s remit was extended to cover pension liberation schemes. I am not totally convinced by the argument that these were not known about in 2004be. Be that as it may, it is clear that, like Clause 1, this provision is necessary only because of a lamentable series of failures of Government, of legislation and of regulators.
It is of course right that members of occupational pension schemes should be compensated where they are victims of dishonesty and have a reasonable expectation that they should be protected. But we need to ask: why is this happening, and what can be done about it? This Bill is just a sticking plaster and we need to address what lies beneath. For example, we have to consider what the role of online advertising and spam has been. I have no doubt that there should be specific provisions in the draft online harms Bill, and we will certainly seek to add these when it comes before us. The Bill needs to tackle financial crime and advertising.
We have the stark warning from the House of Commons—both the Treasury Committee and the Work and Pensions Committee—that there is a risk of large financial losses to the public. This is all in the future, not something that has happened and will not happen again. The problem we face is that financial crime is ever evolving. We were told that pension scams were not recognised as a threat back in 2004. Of course, the arrangement goes back to 1995, following the Maxwell scandal. The reason pension funds are sitting ducks for this sort of fraud is that, in Willie Sutton’s apocryphal phrase, “That’s where the money is”. He was supposed to be talking about robbing banks. Here, we are talking about pension funds. Regrettably, in my view, the front door has been left open following the move to so-called pension freedoms. As well as claiming credit for the additional liberties introduced, responsibility has to be taken for the unintended consequences, which are indeed dire.
Can the Minister tell us what the Government are doing to get ahead of the game—to take a lead and not just react to the latest scandal in this area? We also need to ask: what more can pension funds themselves do to protect members? I recognise the difficulties, but it is the funds with members who are not subject to fraud which will have to meet the cost of this measure. There is every incentive for the industry itself to take a lead, so what steps will the Government and the Minister be taking to encourage the development of this work?
Finally, it is worth noting the amount of money involved in dealing with pension fraud: up to £350 million in compensation, we are told. That is no mean sum, particularly when set against the existing scale of the fund when it held only £26 million. The £350 million figure was estimated a year ago, at the time of the trial. Can the Minister provide an updated estimate of what the ongoing growth in the figure will be?
Lord Moylan (Con)
My Lords, my remarks relate to Clause 1. I preface them by saying that I have benefited from briefings by certain firms of city stockbrokers. This is obviously a regrettable but necessary Bill, which, of course, one supports. At times like this, one casts around looking for people to blame for getting us into this situation. It could be the avarice of the promoters, the weakness of the regulators or the cupidity of the private investors. It is on the last that I wish to focus my remarks, because it would be a great mistake if we were to conclude from this that private investors cannot be trusted to know where to put their money and that they should be further protected and restricted in the opportunities available to them. To take one example, over the last 12 months, literally billions of pounds have gone into Premium Bonds and National Savings products—sums totally dwarfing what was invested in London Capital & Finance—showing that private and retail investors can and do make very sensible choices.
However, it is not surprising that some private investors end up investing in dodgy minibonds, given that we have removed from them the opportunity to make respectable investments. When I refer to private investors, I am not talking about just comfortable rentiers but perfectly ordinary people, some of them called Sid. What has happened in the last 10 or 20 years to the opportunities available to them for investment in respectable securities? In the case of equities, it is true that they can invest in the secondary market, but the new issues of equity securities which it was possible for them to invest in have almost completely dried up. The IPOs no longer reach the public markets; they are all now private placements because it suits finance directors to cut the private investor out and the regulators are compliant in that: no more Sids.
What then about government bonds or gilts? These used to be available for purchase at the Post Office. If you wanted to invest in a new issue of gilts, you could literally cut a coupon out of a newspaper and send it in, making a non-competitive bid. This hardly happens anymore. Let us take, for example, the Government’s recent green gilt. It was not marketed at private investors at all. Instead, private investors will in due course be offered an opportunity to invest in the “green bond”, but, if you look at it, this is not a bond at all; it is another national savings fixed-term deposit product. The Debt Management Office says, “Why should we reach out to private investors beyond what we do? We get all the money we want from them through the existing national savings products.” But that is the attitude of the bean counter, not the nation builder.
I come finally to corporate bonds—highly rated bonds issued by large companies. The effect of European Union regulation and, particularly, the prospectus directive, which is still in force, is that a bond with a denomination of less than €100,000 requires much more elaborate regulation. When I worked in bonds 30 or 40 years ago, the private investor was the backbone of the market. The denomination of most bonds was closer to a thousand dollars or pounds than 100,000, so they were available—you could invest in them. Now, you need €100,000 just to buy one, so, of course, private investors are effectively cut out of that market, and there are other reasons why these securities are no longer available.
This is not just about where people put their money. In my view, it is about the democratisation of financial markets, or rather about their de-democratisation over the past 10 to 15 years. It is also to some extent about levelling up, and it should be on the Government’s agenda that ordinary people have access to reputable financial investment in the way that large institutional investors do, and they no longer have it. It is also about winning and maintaining popular support for the financial services markets, which are important to us and our economy. They are more fragile if they are totally disconnected from ordinary investors. This is about giving investors an opportunity to avoid having to invest in alternative, dodgy mini-bonds that in some cases need to be rescued at the expense of the Treasury.
This is a big subject and I do not expect a comprehensive answer from my noble friend this afternoon, but I hope that he will be willing to meet me and one or two City experts, and will possibly even rope in the Economic Secretary to the Treasury, because this is too important a subject for changes to be made through a whittling of regulation and other administrative changes, as we have seen over the past 15 years, without occasionally, as today perhaps, stopping to take stock of the cumulative effects.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise to make two fairly brief points in this short debate with a limited number of participants, which is disappointing given the importance of the issues behind the Bill. I go back to a much larger Bill that had a little more participation, the then Financial Services Bill, and to the Second Reading speech of the noble Lord, Lord Agnew of Oulton, who said:
“we remain committed to ensuring that the UK maintains the highest regulatory standards and remains an open and dynamic global financial centre. This is even more important now that we have left the European Union … the UK must assume full responsibility for its financial services regulation ... this will be underpinned by an unwavering commitment to high-quality, agile and responsive regulation, with a focus on safe and stable markets”.—[Official Report, 28/1/21; col. 1810.]
Does the Minister acknowledge that the need for this Bill points out that our regulatory standards are not the highest they could be, that in fact they are disastrously poor, and that this is a threat to the security of us all? Further, will he acknowledge that words such as “competitive”, “dynamic”, “agile” and “responsive” are not compatible with the desire expressed for a safe and stable financial market?
As we heard very often from the Government during the passage of the Financial Services Bill, the financial sector is regarded as a source of great profits, but we see the cost of those profits in not just the financial suffering of the people being compensated under this Bill but in the human impact. We are talking about people who have seen large chunks of their pensions savings and their entire future life disappear, with years of uncertainty ahead of them. We think about the mental and physical health impact that has on people and the threat that the financial sector is presenting.
I will move very briefly to the specifics of the Bill, and say that I look forward to the speech of the noble Lord, Lord Sikka, who I have no doubt will address regulatory failure in much greater detail. A couple of questions need to be asked. The Government have acknowledged that the LCF investors were innocent, duped and failed by the regulator, yet there is a cap on compensation of £68,000. This is a government failure; should we not be saying, as we have heard in other debates in your Lordships’ House, as with the building safety scandal, that government failure should be met by full government compensation, not people forced to lose out through no fault of their own? What about investors in Blackmore Bond, in Basset & Gold, in secured energy bonds and, indeed, in Connaught, where it was acknowledged that regulatory supervision was “not appropriate or effective”? The Government have said that this particular scheme—this Bill—has come about as a result of unique and exceptional circumstances, but does the Minister acknowledge that there is nothing unique or exceptional about this: this is business as usual in our financial sector far too often?
I turn, very briefly, to the pension liberation fraud. We have seen pensions treated as a market. It is clearly not a safe or stable market, as the noble Lord, Lord Agnew, was saying in debates on the Financial Services Bill. Should it really be a market at all?
Lord Sikka (Lab)
My Lords, it is a pleasure to follow the noble Baroness, Lady Bennett of Manor Castle. The London Capital & Finance scandal tells the familiar story of privatising profits, socialising losses, frauds, fiddles, mis-selling, negligent regulators and ineffective auditors, while innocent people have to pick up the tab. The much-maligned state has to come and somehow clear up the mess made by the City of London once again. I welcome the compensation for the London Capital & Finance investors, but I have a number of questions for the Minister.
There are mini-bond scandals, as the noble Baroness, Lady Bennett, said, at Blackmore Bond, Basset & Gold, the Mexican food chain Chilango and many others, but no compensation has been offered, even though the FCA failed to regulate them properly. The collapse of LCF was investigated by Dame Elizabeth Gloster, but why is there no independent investigation of other mini-bond scandals? The other scandals may be smaller, but that does not mean that the pain is any less for people who have been defrauded, cheated or misled. The Government claim to have looked at 30 mini-bond firms that have failed over the last six to seven years, but have failed to elaborate whether there was any mis-selling or fraud and have certainly offered no compensation to other investors. When will the others be compensated? If the FCA’s negligence is a defining factor, as the Minister indicated, then many others also need to be compensated. For example, Neil Woodford’s Equity Income Fund collapse in the summer of 2019 left a lot of investors out of pocket. The FCA was negligent, but there has been no compensation. The independent report on the collapse of Connaught stated that the FCA supervision was “not appropriate or effective”. It could have done more to protect consumers, the report said. The investors lost over £100 million but have so far recovered only £18.5 million through litigation. Why was there no compensation for them? Again, the FCA failed.
The FCA and its predecessor bodies also failed to properly regulate RBS and HBOS, and those frauds are part of a long-running saga of pass the parcel—nobody wants to deal with it and, again, no compensation was offered. Surely, in the interests of equity and consistency, all those negatively affected by the FCA should be offered compensation. The Minister referred to the earlier precedents of Equitable Life and Barlow Clowes. In both cases, the regulators were negligent, and that is common to all the cases to which I have referred. So once again I ask, why is the LCF, which was founded by a former Conservative donor, being privileged but the others are not?
In spite of the compensation scheme, many LCF investors face huge losses because the compensation is capped at £68,000. This is not equitable. The burden of the cap is uneven and those who have less wealth stand to lose a greater proportion of it. Women are also hit particularly hard because they generally tend to have lower wealth. Some people have also invested more than the benchmark of £85,000 and they stand to lose an even bigger amount. They may well be relying on these savings for their retirement income. Again, can the Minister explain why investors are not being fully compensated? Does justice not really demand that?
Mini-bonds are just the latest instalment of the fraud and mis-selling that has been rife in the City. The FCA is always playing catch-up. After a long list of mini-bond scandals, in January 2020 it introduced a temporary ban on the sale of mini-bonds, which then became permanent in June 2020. The FCA rationale was that
“speculative mini-bonds were being promoted to retail investors who neither understood the risks involved, nor could afford the potential financial losses.”
That occurred to the FCA in only 2020—where on earth had it been while mini-bonds were openly being marketed and sold? Why the delay in recognising the danger? Even now, the FCA does not road-test any of the financial products to see under which circumstances they wreak havoc and what damage they do. The alarm bells should have been ringing long before. For example, as early as October 2015 investors on the MoneySavingExpert site were saying that LCF’s investment “sounds dodgy”. People were being warned as early as that but the FCA took no notice of those warning signs.
In April 2021, the Government issued a consultation paper on the possibility of bringing the issuance of non-transferable debt securities—that is, mini-bonds—within the scope of financial services regulation. That consultation ended on 21 July 2021. Can the Minister update us on the current position?
In the middle of 2020, the outstanding amount in the UK invested in so-called speculative illiquid securities, which includes mini-bonds, was £1.4 billion. More than 63,500 bondholders may well be holding mini-bonds so the scandal could be much bigger than the amounts currently being assigned to LCF. Can the Minister please enlighten us as to what the ultimate cost of the mini-bond scandal will be? What retribution may be levied on the FCA for its continuing failures? The LCF compensation is being paid and indeed the word “fraud” was used earlier but when was there actually a fraud conviction in connection with LCF? A number of individuals have been arrested and released but I think nobody has been convicted so far. Can the Minister update us on the progress being made by the Serious Fraud Office on this?
Regarding compensation, paragraph 35 of the Explanatory Notes says:
“The Bill confers a new power on the Secretary of State, specifically to provide a loan to the Board of the PPF … expenditure in relation to this Bill will be repaid by the income received from the FCF levy on eligible occupational pension schemes.”
In other words, those who have behaved and are honourable will be hit by the fraudulent activities of some businesses in the City.
Eventually, a loan of some £200 million to £250 million may be given, but how will it be repaid? I looked at the Pension Protection Fund’s accounts. The FCF levy for the year to 31 March 2019 was £4.8 million and for the year to 2020 it was £6.9 million. We are talking about repaying loans of up to £250 million. Will the levy double or triple? How many years will it be before these loans can be repaid? What interest rates will be charged by the Treasury or will these be interest-free loans? I look forward to some clarification from the Minister.
The FCA has been negligent, but what is the penalty? The chief executive who presided over the FCA’s negligence has subsequently been promoted and become the Governor of the Bank of England. There is no retribution against the executives who collected vast salaries and bonuses. No action has been taken against the lawyers who advised the company on particular matters. LCF collapsed some time ago. Have any of its directors been disqualified so far? What is the Insolvency Service up to? Again, I seek an update from the Minister.
I would like to raise some questions about auditors. I sought to table a probing amendment to explore this, but the Table Office told me that that cannot be done, because this is a money Bill. That was a lesson for a newcomer such as me who is learning about the various protocols and procedures of this House, so I hope the Minister will not mind if I provide some details on the issue I have in mind.
LCF was audited by three separate accounting firms. The accounts for the year to April 2015 were audited by a small company called Oliver Clive + Co Ltd. At that point, LCF had a turnover of only £14,072, profit of only £782 and share capital of just £1,000. That is hardly enough for a company entering financial services, but that is how it was doing.
The financial statements for the year to April 2016 show a turnover of £948,201, profits of £166,916 and share capital of £50,000. The company had net assets of only £25,592. That meant that the business had little capacity to absorb any financial shocks, which you will certainly experience if you dabble in the financial markets. These accounts were audited by PricewaterhouseCoopers, which raised absolutely no concerns about the business model or the company’s legal status. These accounts probably persuaded the FCA to give authorisation to London Capital & Finance.
The 2017 accounts were audited by Ernst & Young—the auditors seemed to change every year—which raised no concerns about the business model of the company, its legal status or its ability to recover loans of £48 million or redeem bonds of £44.5 million. The equity, or share capital, of £50,000 provided no buffer against any losses. LCF was extremely highly leveraged, with a leverage ratio of 160:1. I remind noble Lords that when Lehman Brothers collapsed, it had a leverage of 30:1. Bear Stearns had a ratio of 33:1.
This was a business with a leverage of 160:1, yet the auditors said it was a going concern and raised no red flags. The FCA did not ask any questions either. What the hell was it doing? Dame Gloster told us that the FCA had no accounting expertise. You do not need accounting expertise to realise that a leverage ratio of 160:1 will lead to disaster. However, the FCA asked absolutely no questions.
LCF had a low equity base, high leverage and low cash; that was basically its business model. It relied on the inflow of new money to redeem loans from investors, a bit like a Ponzi scheme. The LCF directors’ report claimed that
“the structure, interest profile and maturity of the company’s loan portfolio is expected to provide adequate liquidity to meet the company’s commitments to borrowers as well as providing a high degree of certainty that the company will generate revenues that will exceed the company’s expenditure base”.
The auditors showed absolutely no scepticism and simply gave it a clean bill of health.
As the Minister may recall, and if my understanding is correct, businesses authorised by the FCA must engage in a tripartite meeting between the auditor, the management and the regulator. What on earth was discussed at those meetings if high leverage was not?
The audits are currently under investigation by the Financial Reporting Council. It is extremely likely that the auditors will be fined. Noble Lords may wonder where those fines go. For the audit failure investigations before 2016, the fines went to the professional body that authorised the incompetent auditor. It is a bit like a mugger being found guilty and the judgment being that they should make the cheque payable to the muggers’ association. That is what happened.
Since that was exposed by some of us, it all changed in 2016. Now, the fines go to the Treasury. Why should the Treasury benefit from the collapse of London Capital & Finance? Will the Minister give an undertaking that, as and when the fines are levied, they will be given to investors—that they will go in the pot out of which investors will be compensated and not be kept by the Treasury?
I have one other point. The London Capital & Finance administrators are in a feeding frenzy. They have already charged fees of more than £25 million, and those fees are expected to double. Can the Minister tell us what the Government are doing to curb the rapacious appetite of insolvency practitioners and other advisers, because they are removing money from investors who have already suffered?
Baroness Kramer (LD)
My Lords, as the noble Lord, Lord Sikka, found out the hard way, this is a money Bill. That means that we cannot amend it, but it raises a series of questions, especially about the regulator’s responsibilities. I intend to focus my time on those issues.
First, as I have done before, I congratulate Dame Elizabeth Gloster on her report on LCF and the regulator, the FCA. It pulled no punches. She and her team did a service not just to the victims of LCF but to all those working to eliminate abusive behaviour from our financial services industry. Not only should her recommendations be enforced—I await a detailed update from the Minister on that process; he promised it so I assume that it will come in his summation—but, frankly, they have pushed to the length of her remit.
They recommend that LCF and the FCA are not adequate to deal with the situation that has been exposed not just by this scandal but by the many other scandals about which other noble Lords have spoken today. This needs to be a launch pad for deeper change than what Dame Elizabeth was, within her remit, able to examine. I regret that, in what was actually a very useful report, the Commons Treasury Committee did not in the end require the Government to tackle many of the fundamentals.
I will focus on only two of the fundamentals, or we will be here all day. The first absolutely fundamental issue that I want to pursue is the failure of the FCA to act on information provided to it early in the day, when much of the abuse could have been halted in its tracks. Dame Elizabeth notes in detail the anonymous letter that the FCA received and ignored at the time of the first VOP application. That letter
“raised allegations of fraud and other irregularities in respect of LCF”—
I am quoting from the Gloster report.
Dame Elizabeth’s report also detailed further calls to the contact centre at the FCA—that is the main route for passing on information on misbehaviour—in July of 2016 and of 2017. All those calls and contacts were ignored. Action was taken only when, in October 2018, the intelligence team in the FCA, which appears to be completely divorced from the various contact mechanisms through which individuals report concerns to the FCA, “stumbled across”—that is a quote from the intelligence team—a report on another firm that happened to mention LCF. If it had not been in that report, even at that late date the LCF fraud problem would not have been identified.
As your Lordships may know, I am quite involved with the issue of whistleblowing. This pattern of ignoring information is not an exception; it is the norm at the FCA. I fear that even better training, which is one of the primary recommendations, will do little to help. The FCA treats information it receives from individuals slightly differently if it believes that they are whistleblowers under the definition of PIDA—in other words, if they are employees making a protected disclosure—or from other sources, but that difference is only to the extent of taking care to protect the identity of a whistleblower; otherwise, the information follows an almost identical parallel route.
In both cases, the contacts are handled by staff trained, in effect, to manage a complaints line, where the goal is to pacify the caller, who is typically regarded—I have had many discussions with the relevant people at the FCA—as a troubled individual with emotional and mental health problems. They are very kind to those people, but none of the staff has the financial expertise to recognise when they are tripping across a serious financial issue and piece of misbehaviour. Frankly, a few weeks’ training will not change that.
If I were to bring before this House the equivalent US regulator, your Lordships would find that information from contacts is triaged by expert and senior financial investigators. I am told that a minimum of five years’ investigative experience is required to take up that role, because in the US such information is treasured as vital to keep clean an industry in which the abuse of customers is a constant temptation. To get that same approach in the UK would mean turning the culture in our regulators on its head and changing the staffing profile. Frankly, it would require a whole new way of defining and handling whistleblowers, regarding them as a much broader source of information. As your Lordships know, actual whistleblowers under the PIDA definition not only find that their information is often ignored but typically are left to career-destroying retaliation by powerful employers.
I have a Private Member’s Bill before the House to create an office of the whistleblower, which could lead to many of the needed changes, but it needs the Government to make the decision that they need to step in and change that whole culture and the structure, and to put in place an appropriate framework to make sure that we look at those who pass on information and those who blow the whistle as key players in keeping clean a system such as financial services, which has so much power and money. It is, as they say in the States, the civil army that enables the regulator to keep the industry clean.
My second fundamental issue is the regulatory perimeter. The LCF case illuminates how few financial transactions engaged in by small businesses, and often by ordinary people, are actually regulated activities. The Minister said that nothing LCF did was actually a regulated activity. Indeed, this case demonstrates how a company that acquires an authorisation, and therefore is presumed by the public, businesses and ordinary people to be regulated, uses that FCA imprimatur as a false cover for the mis-selling of services.
To illustrate how limited the regulatory perimeter was in the LCF case, if you apply that perimeter, the Financial Services Compensation Scheme covered only £57.6 million of the £237 million in losses that arose from the collapse of LCF.
In recent years we have endured one scandal after another that has fallen outside the regulatory perimeter, including asset stripping by the global restructuring group of RBS, the mis-selling of interest rate caps to SMEs—I could go on for the next half hour. All of these have left victims, because the FCA took the position that it could not act to stop abuse because it was beyond the perimeter. In the end, in these high-profile events the FCA typically gets forced by public pressure and Parliament to do something and some compensation occurs, but that is not a satisfactory system.
The FCA also constantly falls back on the new senior management regime, which it cites as a strength. If ever a scheme proved to be a busted flush, it is the senior management regime. As others have pointed out, it has not been effective; it has not even been used, as far as I can tell, in the LCF case. It has been used with such a light touch—so mildly and with such deference—that frankly, it no longer has any credibility within the financial services industry. No one fears it and no one respects it. We really need to move to a global standard whereby one regulates organisations, not just activities. Without that, the UK will continue to be seen as a natural home for financial rogues who can exploit that perimeter.
I will finish by raising a couple of quick questions about the Bill itself. I join others in saying to the Minister, why does he believe that, in a case where the regulator was so much at fault—Dame Elizabeth Gloster’s report does not say, “On the balance of this or on the balance of that”; it is totally damning—people should receive only 80% compensation capped at £68,000? The investors did not do wrong; indeed, they were not even greedy. They were not being offered extraordinary and exceptional returns; they all looked quite moderate. That was part of the inherent effectiveness of the mis-selling.
If I have read the Bill and the explanatory notes correctly—the Minister will correct me if I am wrong—members of defined benefit pension plans who invested in LCF will be compensated pretty much in full through the pension protection fund. However, the cost of that compensation will be picked up not by the Government but by levies, as the noble Lord, Lord Sikka, said, on the whole body of defined benefit pensioners. Why should the entire pension system be picking up the cost of maladministration by the regulator? I am completely confused.
I am even more confused when I look at pensioners who are in defined contribution arrangements who invested in LCF. They are not going to get all their money back; their compensation will be capped at the 80% limit and the £68,000 maximum. So, depending on whether you in a defined benefit scheme or defined contribution scheme, the outcome is completely different. People who had ISAs will get their compensation, but how can they reinvest it in ISAs when there is an annual ISA limit? These were ISAs they committed to five or more years previously. How on earth is that issue going to be handled? There may be a solution, but I could not work it out, and I apologise if it is my failure to read the detail sufficiently.
Lastly, why are LCF’s victims unable to challenge this Government’s compensation scheme through a full public consultation by the FCA? The Minister said that public consultations take time, but if people are going to get back only 80%, capped at £68,000, they may well have a case that they want to put to the FCA. I do not understand why people have been put in that position. Why do we have no impact assessment? These are always missing at critical points, and they are again with this Bill.
I have some sympathy for our financial regulators, which, frankly, are under resourced and understaffed, but I am alarmed that the Government seem intent on leaving essentially untouched a flawed system, rather than taking on the challenge of fundamental change to create a regulator that the rogues in the industry will genuinely fear. As many have said, LCF is not a one-off. Every time we turn around, it seems, we have a one-off exception. We need the Minister and the Government to take heed and to act.
Lord Tunnicliffe (Lab)
My Lords, with just two substantive clauses this legislation is uncharacteristically straightforward by Treasury standards. It is also uncontentious in what it seeks to achieve. However, as we have heard, the circumstances surrounding the Bill raise important questions such as those asked by my noble friends Lord Davies of Brixton and Lord Sikka. I particularly thank the noble Baroness, Lady Kramer, for her contribution and for setting out how the senior management regime, in respect of which so much was promised, has failed succeed.
I will not provide another account of the events leading up to the drafting of Clause 1, but it is right that bondholders be compensated for the numerous regulatory failings in respect of London Capital & Finance. We all want to see this compensation paid out, and the sooner Royal Assent is granted, the quicker that process can get under way. I am glad that the Parliamentary Under-Secretary of State at the Department for Work and Pensions confirmed in the Commons that the Government intend to complete payments within six months of the Bill being passed. Is the Minister confident that the preparatory work has been completed to the requisite standard to allow this to happen? Are any claims likely to be settled before Christmas?
The behaviour of LCF, which, among other things, ran multiple promotions wrongly implying that its minibond products were fully regulated, was wrong. There is no doubt about it and we must not forget it. As colleagues have noted, the Financial Conduct Authority’s response, whether to early warnings or later in the process, was unacceptable, as was recognised in Dame Elizabeth Gloster’s review. The compensation burden now faced by taxpayers is arguably higher than it needed to be. Both the Government and parliamentarians should, of course, hold the FCA to account and challenge it to do better.
A variety of concerns, some specific and others more general, have rightly been raised during today’s debate, building on others voiced during the Bill’s Commons stages. For once we have little doubt that the Government agree with our discomfort. The Minister, Guy Opperman, did not mince his words when, at the beginning of the Second Reading debate in the other place, he urged the FCA to
“take a good long, hard look at itself”.—[Official Report, Commons 8/6/21; col. 905.]
The body has accepted the findings of Dame Elizabeth’s report in full and is under new leadership.
Concerns about the FCA’s willingness to hold bad actors to account are not new, nor will they go away overnight. However, during lengthy discussions on parliamentary scrutiny of the regulator during the passage of the Financial Services Bill, all sides agreed that it was for those independent bodies to determine how they ran their affairs. None of us should be happy about the events of the past, but we must allow the FCA to implement its reform programme and demonstrate an ability to do better in the future. It might be easier for concerned colleagues to trust the FCA if the Minister could confirm that, in the words of Mr Opperman, there has been “suitable input from Government”. Has the Treasury, as part of this legislative process, reiterated its views on the matter to the FCA? Does the Minister believe that the message has been heard loud and clear?
As the Minister outlined at the start of the debate, Clause 2 amends the Pensions Act 2004 and grants the Secretary of State a new power to lend money to the board of the Pension Protection Fund. It is a response to the November 2020 ruling of the High Court, which determined that claims arising from so-called pension liberation fraud fall within the remit of the Fraud Compensation Fund. We welcome the speed at which the Government are legislating on this matter, although there are questions about how the levy on pension schemes will function and what Ministers are doing to crack down on frauds and scams. My colleague Pat McFadden MP asked a series of questions that did not receive satisfactory responses. I will ask the Minister some of those questions and, if he is unable to answer them today, I hope he will commit to writing.
The levy on pension schemes, which funds compensation arising from such cases, is a flat rate. This means that schemes with a large number of members but where individual pension pots are relatively modest could end up paying a significant proportion of the overall sum. Why have the Government not formulated a more proportionate means of collecting the funds? Is that one of the trade-offs of legislating on this matter as quickly as we are?
Pat McFadden also asked whether Ministers believed that there was a causal link between the greater pension freedoms introduced in recent years and the increased incidence of scams and financial fraud. Does the Treasury believe that there is such a link and, if so, what steps are being taken to crack down on such behaviour? In so far as some scams are carried out online, will the Treasury commit to work with DCMS to ensure that the upcoming online safety Bill contains relevant safeguards?
It is unfortunate that so many people have been caught up in these cases. This Bill, however, provides a means of closing the door on some unsavoury events within the financial sector. Once compensation has been delivered, in the coming months, the key objective will be to ensure that the risk of such incidents occurring again is significantly reduced. I hope that the Minister’s response will reassure the House in this regard.
Viscount Younger of Leckie (Con)
My Lords, I thank all those who have contributed to this afternoon’s short but important debate, and I will address as many of the issues raised as possible. A considerable number of questions were put, not least by the noble Lord, Lord Sikka. I doubt that all will be answered, but I promise that I will do my best and will write to him and others who have participated as necessary. I particularly appreciate, however, the depth of his speech.
At the core of this Bill lies the need to ensure adequate protection for ordinary people who are saving and investing for their future: individuals who, in seeking a better return for their nest egg, have suffered a financial loss which in some cases amounts to almost all their savings. As was mentioned earlier, these are not in general wealthy individuals: the average loss, for example, for a London Capital & Finance bondholder is between £15,000 and £20,000. The impacts serve to highlight the need for a regulatory system that includes the proper protections for consumers, as has been made clear in this afternoon’s debate.
I start with the issues about the failures and regulation of the Financial Conduct Authority raised by many noble Lords, including my noble friend Lord Moylan, the noble Lord, Lord Davies, and the noble Baronesses, Lady Bennett and Lady Kramer. Quite understandably there is concern over the egregious failures in relation to LCF that have been identified and described in great detail in Dame Elizabeth Gloster’s comprehensive report. I echo the favourable comments made by the noble Baroness, Lady Kramer, at the beginning of her speech, about the thoroughness of the report—that much, I think, we can agree on. In particular, the FCA failed to properly enforce the financial promotions regime, which seeks to ensure, among other things, that communications with customers are clear, fair and not misleading—a key theme emerging from this debate. The report also raised issues about the FCA’s ability to join the dots between different pieces of supervisory intelligence to build an accurate and comprehensive picture of what was happening at LCF. In what follows I will give what I hope will be some reassurance, particularly to the noble Lord, Lord Sikka.
The FCA has now put in place a comprehensive plan to address all Dame Elizabeth’s recommendations, including through its transformation programme. I will give a bit of detail about this. It includes strengthening the senior leadership team, recruiting more staff, providing better training, and, crucially, introducing new systems to build better intelligence on firms. The FCA’s process for authorising firms has also been strengthened considerably and, following the improvements, the percentage of applications that are withdrawn has doubled. This reflects the FCA’s desire to ensure that firms start with high standards and maintain them, with the aim of reducing the time, cost and burden of dealing with firms that fail to meet its standards.
Furthermore, the FCA has committed to reporting every six months on the progress of its transformation programme. In response to the point raised by the noble Lord, Lord Tunnicliffe, I say that my colleague in the other place the Economic Secretary continues his close dialogue with the chief executive, so that the Government are fully apprised of the progress and can hold the regulator properly to account.
I would like to touch on an interesting debate on competitiveness initiated by the noble Baroness, Lady Bennett, but there is not much time to expand on it. I understand her views but I do not agree with them. There is a balance to be struck between consumer protection and competitiveness. The UK has a world-leading financial services sector, employing more than a million people nationwide. These jobs are spread across all regions of the country, with two-thirds of those working outside London. The sector also supports British businesses to expand, manage cash flow, invest in themselves and ultimately create more jobs. In 2019 alone, the UK exported £60-billion worth of financial and insurance services, with a trade surplus of £41 billion.
There has been a great deal of debate about the need to improve the competitive standing of our financial services sector. However, episodes such as the collapse of LCF serve to illustrate that our world-leading sector can succeed only if it is supported by a regulator that consumers and businesses can trust, underlying the importance of the reforms already under way at the FCA. I hope this provides a more expansive answer to the noble Baroness, Lady Bennett.
My noble friend Lord Moylan also raises some important points about regulation and about incentives in the retail investment market. I am of course happy to meet to discuss these matters further, and I will pass on this request for a meeting to my honourable friend the Economic Secretary. I would like to say a bit more to my noble friend, because more than a decade of rock-bottom interest rates has led some investors to seek alternative investments to generate returns. The high interest rates on offer from LCF should have prompted questions from potential bondholders about the risks. While some may have understood those risks and invested anyway, it appears that LCF’s disclosure materials and marketing strategy—back to communication —led others to believe that they were investing in a product far safer than it was.
In September, the FCA published the latest on its strategy for dealing with the problems and harms in the consumer investments market. The FCA’s goal is to see more people investing in mainstream investment products, and it has committed to explore regulatory changes to enable firms to provide more sales and support services to mass-market consumers investing in straightforward products, such as stocks and shares ISA wrappers.
The FCA has set up a dedicated team to help firms to develop mass-market automated advice models—or so-called robo advice—in its continued efforts to ensure that consumers can access high-quality, affordable and suitable financial advice, as well as free-to-access financial guidance, when they need it. The FCA is also taking action to address issues relating to inappropriate high-risk investments such as those mentioned by my noble friend Lord Moylan. For example, it is using data and technology to spot harms faster, continuing its campaign to help consumers to make better-informed investment decisions, and removing out-of-date permissions to reduce the risk of firms misleading consumers about the level of protection offered or giving credibility to unregulated activities.
We must also ensure that regulation targets the correct activities. On the specific issue of mini-bonds, the FCA introduced a ban on the sale of the most speculative and opaque instruments to retail investors in January 2020. The Treasury is also considering proposals to introduce further regulation of so-called non-transferable debt securities, following a consultation earlier this year. I think the noble Lord, Lord Sikka, asked for an update on the consultation. As he may know, the consultation closed on 21 July. The Treasury is considering responses and should be in a position to decide how to proceed in the autumn—later on in the autumn, it is fair to say.
I turn to the compensation matters for LCF. A number of noble Lords, including the noble Lord, Lord Sikka, and the noble Baronesses, Lady Kramer and Lady Bennett, asked: why LCF and not other firms? LCF is not the only firm to have failed and, within any healthy regulatory environment, it is inevitable that firms fail from time to time. However, this implies no complacency whatever. I have made it clear already, I hope, that we must never drop our guard on regulation but it is an important point of principle that the Government do not step in to pay compensation in respect of failed financial services firms that fall outside the Financial Services Compensation Scheme. As I have explained, this would create a moral hazard for investors and potentially lead to individuals choosing unsuitable investments, believing the Government will step in if things go wrong.
Inevitably, there will be some individuals seeking compensation in relation to other failed companies and investments. But it is important to emphasise that the situation regarding LCF is exceptional. It is the only failed firm issuing this type of opaque instrument that was authorised by the FCA. To answer the points raised, this is why LCF alone is covered by this compensation, and not the other unregulated minibonds. Let me be clear also that the fact that LCF was authorised was central to many of Dame Elizabeth’s findings. In comparison, other minibond firms such as Blackmore Bond and Basset & Gold were not authorised by the FCA. Indeed, the FCA cannot be said to have the same set of responsibilities towards failed minibond issuers that were not authorised, since the issuance of minibonds is not a regulated activity.
I turn further to the London Capital & Finance clause. The first part of the Bill will provide parliamentary authority for the Government to pay compensation to LCF bondholders. I recognise that this has been an exceptionally difficult time for bondholders, and I hope the compensation via the government scheme will offer some relief of the distress and hardship they have suffered and provide some closure on this difficult matter. The noble Baroness, Lady Kramer, asked about consultation. A consultation and impact assessment would slow down this process and create unnecessary delays to compensation payments, hence the reason for bringing into the Bill the matter of not needing that.
The noble Lord, Lord Tunnicliffe, asked about preparations to launch the scheme. The Treasury has been working closely with the Financial Services Compensation Scheme, which will administer the scheme on the Government’s behalf to ensure it can launch and begin making payments swiftly after Royal Assent. This will ensure all payments can be made within six months, and I have confidence that they will succeed in that aim.
I hope this helps with the question raised by the noble Lord, Lord Sikka: the Government expect to pay out around £120 million in compensation to approximately 8,800 bondholders in total. My maths is not too good, but I make that around £12,000 to £13,000 each. As noble Lords are aware, the purpose of the second clause of this Bill is simple: to ensure the Fraud Compensation Fund has the funds necessary to continue to pay compensation to eligible schemes that make a claim.
I turn to future pensions scams and how the Government can be sure that scams of this nature do not happen again. This was a key point raised by the noble Lords, Lord Tunnicliffe and Lord Davies. I would like to give some reassurance to noble Lords about the several measures being taken to look at this. To answer a point raised by the noble Lord, Lord Davies, about how the pensions regulator, TPR, should be strengthened: when scam cases started to emerge over a decade ago, the Pensions Regulator was faced with a very high volume of potential investigations. To target finite resources most effectively, The Pensions Regulator prioritised resources to the highest-risk cases and took steps to liaise with other agencies to disrupt this activity. There were several reasons why the Pensions Regulator may not have taken direct action on a particular case: often, another agency was already acting or best placed to act; or, the scam was no longer actively operating, and the Pensions Regulator had to consider whether the risks to savers would be mitigated by appointing a trustee. That was then; we need to look to now.
Crucially, HMRC has tightened its schemes registration process. It now carries out a detailed risk assessment of a scheme administrator before deciding whether to register the scheme and has power to deregister a scheme where it has reason to believe the pension scheme administrator is not fit and proper. Those who have defrauded through pension liberation fraud have been deregistered and the schemes transferred to independent trustees. Companies and their directors have been referred to the Pensions Regulator for enforcement action. Some cases are also being actively considered by the Pensions Ombudsman through its pensions dishonesty unit. The Pensions Ombudsman currently has 32 pensions dishonesty complaints relating to 19 different schemes. These cases are in varying stages of the pensions dishonesty unit process. The House will know that the Pensions Regulator and the Pensions Ombudsman are independent bodies, and the Government cannot comment otherwise on individual cases.
Furthermore, the Pension Schemes Act 2021 gives the Pensions Regulator stronger powers so that savers can be confident that their pensions are protected, and the regulator can act if pensions are put at risk. DWP is now planning the secondary legislation relating to Section 125 of the Act. These measures make it significantly harder for fraudsters to successfully set up pension liberation schemes with the intention of committing fraud.
We have heard about the loan in contributions today from noble Lords including the noble Lord, Lord Sikka, who raised the point about the expectation of cost recovery. The expectation is that costs will be recovered over a 10 to 15-year period to spread the costs for the schemes through the proposed levy. The reason a loan is required is that the Fraud Compensation Fund is currently funded by a levy on eligible occupational pension schemes which, as I said earlier, will not be sufficient to fund these additional pension liberation claims in the short term. It is a widely accepted principle that the pensions industry should meet the cost of protecting the pensions sector, rather than the taxpayer, which perhaps addresses some points raised by the noble Baroness. However, I understand that the costs must also be tolerable and manageable for the industry. The Government will therefore consult by the end of the autumn about the fraud compensation levy ceiling for all eligible occupational pension schemes.
Focusing on the levy, in particular the flat rate of the compensation levy, which was raised by the noble Lord, Lord Tunnicliffe, it is important to note that it is for the Pension Protection Fund to set the levy within the ceiling set in legislation, not the Government. I am told that for the 2021-22 financial year master trust schemes, to reflect their particular characteristics, are being charged an annual levy rate of 30p per member, with other eligible pension schemes being charged 75p per member.
The noble Lord, Lord Davies, raised some points about the Pension Protection Fund. Briefly, both the PPF and the Fraud Compensation Fund were established by the Pensions Act 2004. Since coming into operation in 2005, the Pension Protection Fund has taken responsibility for more than 1,000 defined benefit pension schemes, comprising more than 260,000 members. It paid out £860 million in benefits in 2019-20, the last year for which statistics are available.
I would also like to address pension freedoms, as raised by a number of noble Lords, including the noble Lords, Lord Davies and Lord Tunnicliffe, and the noble Baroness, Lady Bennett. As the House will know, pension freedoms are different from pension liberation fraud, which involves members being persuaded to transfer their pension savings from legitimate to fraudulent schemes, with promises of high investment returns or access to a loan from the pension scheme before age 55. Pension liberation fraud and pension freedoms are entirely separate issues. Pension freedoms were introduced in 2015, after these pension fraud cases. The purpose of pension freedoms is to give individuals the choice as to how to access their own hard-earned savings, as the Government believe it is right that individuals are trusted to choose how to access their pension income.
In response to the criticisms made of pensions freedoms today, I highlight that Financial Conduct Authority research has found no significant evidence of consumers drawing down their savings too quickly. The extensive retirement outcome review in June 2018 found that those withdrawing defined contribution savings had other forms of retirement income or wealth.
I turn now to points raised about the online safety matters. We heard reference to this from the noble Lords, Lord Tunnicliffe and Lord Davies. I remind noble Lords that this measure is specifically to provide a loan to the Fraud Compensation Fund, to ensure that it can compensate those who have suffered pension fraud. So, online fraud is out of scope, but I understand that the online safety Bill will not tackle fraud facilitated through paid-for advertising—a point raised, I think, by the noble Lord, Lord Davies—such as advertisements on search engines. I am aware that DCMS is considering how online advertising is regulated through its online advertising programme. I have my noble friend Lord Parkinson here, who I am sure will nod his head.
In the brief time available, I will try to answer a few final questions before concluding. One point raised by the noble Lord, Lord Sikka, was on Woodford. There are important differences that distinguish LCF from the Woodford Equity Income Fund, because Woodford operated an authorised fund, which, unlike many bonds, was regulated by the FCA and was within the remit of the Financial Services Compensation Scheme. This means that where individuals have a legitimate claim to compensation—for example, because products have been mis-sold—they are able to make a claim to the FSCS. As the noble Lord will know, the FCA is investigating what went wrong at the Woodford Equity Income Fund and considering what rule changes may be necessary to help prevent such issues arising in the future. It would be improper for me or the Government to intervene or comment before this investigation is complete.
Another point was raised by the noble Lord, Lord Sikka, on the SFO investigation. Very briefly, as he will know, the SFO launched its investigation in March 2019 and he will understand that I am not able to comment on the ongoing investigation, except to say that it is a highly complex case which the SFO is working hard to unravel. I hope that provides some reassurance.
There are some other questions but I want to address the one raised by the noble Baroness, Lady Kramer, on why compensation is set at 80% and the cap at £68,000. I answer that by saying that the government scheme appropriately balances the interests of bondholders and the taxpayer and will ensure that all LCF bondholders receive a fair level of compensation in respect of the financial loss they have suffered. With any investment, there is a risk that sometimes investors will lose money but, to answer the question, to avoid creating any misconception of moral hazard for investors and leading investors down the line that choosing unsuitable investments will lead them to receive compensation in full, a wide range of factors needs to be taken into account. These losses would not ordinarily be compensated for at 100%, and 80% is a level that has been set in terms of the LCF bondholders’ initial investment, taking it up to a maximum of £68,000.
Bearing in mind the time, I will certainly read Hansard and write a letter to answer any questions that I have not managed to address, if I feel that that is the case. I thank all noble Lords who have engaged in this debate and I commend the Bill to the House.
Royal Assent
Wednesday 20th October 2021
(3 years, 2 months ago)
Lords ChamberRead Full debate Read Hansard Text Amendment Paper: Consideration of Bill Amendments as at 22 September 2021 - (22 Sep 2021)